Q2 2022 Silvergate Capital Corp Earnings Call

Hello, everyone and welcome to the <unk> Capital Corporation second quarter, Chief I was in 20 <unk> earnings Conference call. My name is Victoria, and I will be cool nature pool today, if you'd like to ask a question. Please press star one on your telephone keypad to withdraw your question. Please press Star Chi Wen, but frankly asked your question. Please issue.

Your line is on mute locally and not to say that you're a hunter stem back to begin. Please go ahead.

Thank you operator, and good morning, everyone.

We appreciate your participation in the silver <unk> Capital Corporation second quarter 2022 earnings call.

With me here today are Alan Lane, our Chief Executive Officer, Tony Martino, Our Chief Financial Officer, and Ben Reynolds, Our Chief strategy Officer.

As a reminder, a telephonic replay of this call will be available through 11 59 P. M. Eastern time on August <unk> 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 that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission, we do not undertake any duty to update such forward looking statements.

Now I would like to turn the call over to Alan.

Thank you Hunter and good morning, everyone.

I am pleased to share our strong second quarter results with you today.

I'm, especially proud of our results this quarter in light of the challenging backdrop facing the broader digital asset ecosystem.

Driven by our diverse revenue streams silver gate delivered record net income available to common shareholders of $35 9 million, an increase of 45% since last quarter and EPS of $1 13 per share.

An increase of 43% from last quarter.

Notably net interest income of $75 million increased $21 million compared to the first quarter as we benefited from the rising interest rate environment, which Tony will touch on in more detail.

In times like this it's important to highlight what differentiates over gate.

Our platform was built to support our clients and that's relatively nascent industry during periods of high volumes market volatility and transformation just like we're seeing today.

The silver get exchange network or said, our highly scalable technology platform that operates 24 seven to $3 65.

<unk> is our offering and serve as critical market infrastructure.

We've experienced high volumes and significant volatility many times since we started banking industry over eight years ago and I'm sure. This won't be the last.

In fact, it was this experience of ever increasing peak volumes and volatility, which informed the creation of the sand and influence how we manage customer deposits and liquidity.

Our balance sheet is optimized for client liquidity and risk management practices are at the forefront in all aspects of our business.

As a regulated bank, we take compliance seriously and our robust risk management framework ensures we are well prepared for any market environment.

Finally, we take a disciplined approach to innovation as.

As we have always done our goal is to introduce new products that solve problems for our customers and increase the value of our franchise, while also managing risk.

Now I'd like to provide a bit more detail on some of our key metrics.

As we have done over the past few quarters, we continue to work with coin metrics to better understand how activity on the Sun, it's correlated with the broader digital asset industry.

According to coin metrics data in the second quarter, both bitcoin and a theory M dollar trading volumes were relatively flat.

Despite these trends the fence off some of its highest daily trading volumes ever during the second quarter with transfer volume of $191 billion, an increase of 34% on a sequential basis.

Average deposits from digital currency customers declined to $13 $8 billion in the second quarter compared to $14 $7 billion last quarter.

That said average deposits throughout the quarter were higher than end of period deposits in Q1.

We saw a significant range of deposits during the quarter from a high of $17 $6 billion to a low of $12 6 billion.

Which we believe was caused by the significant dislocation that occurred within the broader ecosystem that was in part impacted by the collapse of various digital asset platforms.

However, silver gate did not experience any loss of customers deposits or capital as a result of these events.

Testament to the power of our model and our robust risk management framework.

The number of digital currency customers increased to 1585 in the second quarter, an increase of over 300 customers since the same quarter last year.

We added over 80 clients during the quarter a decline.

When compared to Q1, but consistent with the average clients added per quarter in the second half of 2021.

As we continue our focus on adding high quality clients that bring the most value to our platform.

Our pipeline of potential new digital currency customers remains robust with over 300 prospects.

Turning to Sen leverage our bitcoin collateralized lending product. We saw continued strong demand for the product with total approved commitments growing 28% to $1 4 billion.

Compared to $1 1 billion at the end of the first quarter.

In addition, we experienced a range of outstanding Sen leverage balances during the quarter between $303 million and $732 million with an average outstanding balance of $560 million.

Importantly, all of our sand leveraged loans performed as expected with no losses or forced liquidations.

As a reminder by design these loans are over collateralized and our customers have the ability to draw paydown or pledge additional bitcoin collateral to comply with the terms of their loan agreement 24 hours a day seven days a week finally, I want to provide an update on our stable coin infrastructure initiatives.

Following our announcement in January that we acquired select blockchain based payment technology assets from the D. M Group, we are still on track to launch our own U S. Dollar back stable coin in 2022.

We look forward to updating you on this initiative in the coming months.

I am extremely proud of our accomplishments this quarter amidst a challenging environment and the digital asset industry.

I look forward to providing further updates on our progress in the second half of the year.

I'll now turn it over to Tony to review, our financial results in more detail before we take your questions Tony.

You Allen and good morning, everyone.

Starting on slide five with our key financial results.

Despite a challenging environment and the overall digital asset industry. So we're gate reported record second quarter net income available to common shareholders of $35 $9 million or $1 13 per diluted common share.

Third to $24 7 million or <unk> 79 per diluted share in the first quarter and up from $29 million or <unk> 80 per diluted share in the second quarter of 2021.

Revenue of $79 $8 million was up 33% compared to the first quarter and up 88% 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 remained relatively stable to the prior quarter and increased 29% compared to the second quarter of 2021.

Next on slide six as Alan mentioned average digital currency customer deposits were $13 8 billion in the quarter down 6% compared to last quarter.

As in previous quarters, our deposits from digital currency customers can fluctuate significantly.

As evidenced by high and low daily total digital currency deposit levels of $17 6 billion and $12 $6 billion, respectively. During the quarter.

To reiterate we believe this wide range of deposits was a result of significant dislocation that occurred throughout the broader ecosystem, which was in part impacted by the collapse of various digital platforms.

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 net interest income was $75 million in the second quarter, an increase of $21 million compared to the first quarter and $42 million compared to the second quarter of 2021, as we benefited from the rising rate environment.

Net interest margin was 196% for the second quarter.

Compared to 136% in the first quarter and $1 one 6% in the second quarter of last year.

The increase in NIM from the prior quarter was driven by the rising rate environment benefiting securities and loans.

Our securities portfolio totaled $11 $8 billion with a yield of 166% for the second quarter.

Slightly from a balance of $12 2 billion at the end of the first quarter with corresponding yield of one 3%.

Year over year Securities increased $5 $6 billion.

We continue to take an active and measured approach to balance sheet management with an objective of maintaining a high quality securities portfolio to bolster net income in this rising rate environment, while mitigating risk.

Moving onto the loan portfolio.

On a year over year basis, total loans were down $22 million or 1%.

While some leverage in mortgage warehouse balances increased compared to the same period last year.

As a reminder, we sold certain commercial real estate multifamily real estate and construction loans last quarter.

The allowance for loan losses remained unchanged from the prior quarter at $4 $4 million.

As we've said in the past our real estate lending portfolios are continuing to pay down and we are not originating new loans in these categories.

As we discussed last quarter.

We are currently operating in a rising rate environment.

Silver gate continues to be well positioned for further rate hikes as of June 32020 to approximately 55% of our securities are floating rate.

Additionally, approximately 88% of our loans held for investment were floating rate and a substantial majority of our some leverage in mortgage warehouse loans are floating rate.

To give you a sense of our current interest rate sensitivity, assuming a static balance sheet and a positive 25 basis point interest rate shock net interest income is estimated to increase approximately $16 million over 12 month period.

Turning to slide eight noninterest income for the second quarter of 2022 was $9 $2 million, which was relatively flat compared to the prior quarter.

The decline in noninterest income on a year over year basis was primarily related to a decrease of $2 $5 million or 22% in deposit related fees as a result of lower trading volumes across the broader industry.

Slide nine shows noninterest expense for the quarter of $36 million up $2 $5 million from the prior quarter and $9 million compared to the same quarter of last year.

The increase in noninterest expense compared to the first quarter and prior year is primarily due to increases in salaries and employee benefits and professional services expenses driven by continued investments in our strategic growth initiatives during the quarter.

We will continue to make strategic investments throughout the second half of the year to support our growth initiatives.

As a result, we continue to expect full year 2022 operating expenses to be in the range of approximately $130 million to $140 million, excluding any intangible amortization.

Overall this was another strong quarter for silver despite market volatility and I'm excited to continue our growth throughout the rest of the year.

With that I.

I would like to ask the operator to open up the line for any questions.

Operator.

Thank you we will now start the Q&A session, if you'd like to ask a question. Please press star one on your telephone keypad to destroy a question. Please press star team.

Ask your question. Please ensure that your line is on me to lay claim we ask a question asked to limit themselves to one question at that time.

Our first question comes from Steven Alexopoulos JP Morgan. Please go ahead.

Hey, good morning, everyone.

Good morning, Steve I wanted to start I wanted to start with a big picture question. Sophie look right. There was a sharp drop in crypto prices in the quarter. There were spillover effects right terrorists Celsius voyage or lot of negative news in the space well. It's happened before it's really the first time, we're seeing this play out with institutions more in the ecosystem.

I'm curious how your institutional customers responding to all of this and are you seeing any slowdown in the appetite to go into the ecosystem.

Yeah. The short answer is no we're not really seeing any any slowdown and I think that's borne out by the combination of the number of clients. We added in the quarter plus the number of prospects who are still in the pipeline and I think what.

What we've experienced over the years and not just this this last quarter, but over the last several years is as you know it takes quite a while for institutions to get to the point, where they're ready to trade and so you know it starts with a with watching this space for a while and then.

To start developing a thesis and then they start to.

To seek the addition that you are the initial approval excuse me the initial approvals they need internally and then they started interacting with with the other parties such as silver gate and others and they might want to trade with them and so there's a big ramp up.

And I think many of the institutional players that havent gotten yet or looking at this pullback as an opportunity. So that's the long winded answer.

Okay.

Alan you've been in this ecosystem probably longer than anybody on the call.

Given I know, it's tough to know what deposits are going to do right because they're so volatile but at this stage. What's your best guess right. How this could play out and what we might see for deposit growth in the second half.

Yeah, I've learned a long time ago, Steve did not try to make any predictions in this in this ecosystem, but but what we can do is is look back to history and.

See how how are deposits and how our customers.

You know have have grown in prior periods when there's been a pullback in the price of bitcoin and other digital assets.

And what we've seen is is stability in our deposit base, we typically see during periods of high volume rising prices.

Volatility, we see deposits grow and then when things turn around as they have recently when we go down in prices and volumes start to shrink I'm talking about transaction volumes than we typically see our our growth flattened out but we've no.

Not historically seen significant drawdowns at and I think it's important to just double click on this for a second and it's because of the way our customers who use the span the sand is the on ramp and the off ramp.

For the institutional players in this ecosystem and so.

And as you know we've talked about this in prior conversations we we encourage our customers to only keep on the same platform what they need to run their business, whether that's been exchanged and the way they think about liquidity for their customers and then the institutional investors et cetera and.

And so we typically see a lot of transaction volume during these periods of volatility, but we don't see the big draw Downs that I think everybody was expecting of course that in the past and as I said at the outset, we really don't try to predict the future. We just try to make sure that.

The platform is operating 24, seven and that we have strong a strong liquidity position. So that we can serve our customers.

Whether they're looking to invest or whether they're looking to divest.

Capex, we will now take our next question coming from will Nance <unk> Goldman Sachs. Please go ahead.

Hey, guys. Good morning, Congrats on the nice quarter I wanted to kind of follow up on Steve's question on the deposit trends I mean, clearly a wide range of all of daily balances in the quarter. This quarter given all of the all the volatility that we saw in the quarter one of the most common questions that we get is.

How to think about a quasi event happening on the Pip, though ecosystem and how that impacts your deposits and so I was wondering if you could just about a little bit more color on just the cadence of deposits throughout the quarter.

Was there anything in particular that you saw that drove kind of like trends throughout the quarter and just maybe help us think out in the future when we see more volatility in the space.

Yeah, well, maybe since I've already addressed part of this in the answer to the previous question, maybe I'll turn it over to Ben and see if that if he has any additional color. He think he thinks is relevant to your question. Thanks.

Yeah. Thanks for the question well I think that you know.

Just to just to sort of level set on a on a period end basis.

If we use bitcoin as a proxy.

And look at the price on March 31, the price of Bitcoin was $45000 roughly and at the end of June the.

The price of Bitcoin was.

About $20000 and so we've seen.

Incredible deterioration of the overall market value.

The underlying during during the quarter.

Also if you look at volumes for.

For the second quarter and you compare they were up compared to the first quarter, but if you compare them to the fourth quarter.

They were still down about 28% on the year so.

As Alan mentioned, it's really difficult for us to look out in the second half.

And know how the underlying is going to trade and what trends, we're going to see.

But more directly to your question.

We know that.

Silver gate.

<unk>.

Driven company and we saw the benefits of discern.

In the second quarter.

As our customers were trying to get in and out of <unk>.

Positions related to the collapse of different assets and different platforms and what we saw during that time was that.

Arbitrage opportunities.

In the ecosystem and our our customers who are some of the blue chip firms in the space.

All of the Blue chip firms in the space who have.

Balance sheets that they can put to work.

And certainly have the trading strategies to take advantage of those arbitrage opportunities did exactly that and so.

It's really difficult to sort of say what is what could be the next shock in the system and what could be the potential outcome of that but I think what what folks should anchor on is the fact that.

We've just been through a very.

Yes.

A period of tremendous turmoil and yet.

You all can see the results that we had in the second quarter. So we feel really good about the products that we built about the platform that we've built in about our liquidity and risk management practices and so.

Hard to know what's going to happen with deposits, but overall, we feel good about.

Our ability to deliver for our customers.

Got it Super helpful. I appreciate that and then I guess just a question on the Sen leverage commitments, obviously very very nice growth in our commitments. Despite the decline in the balances and I heard the commentary on average balances during the quarter. So I think I'm all good there, but just a general question about how youre thinking about concentration levels of.

At the same leverage commitments relevant for all capital and any update on kind of like off balance sheet alternatives for that or kind of how youre thinking about the ability for us to originate new commitments going forward.

Yeah, I'll I'll step back in and take this one well so on the on Sen leverage we couldnt be more pleased with with the way.

With the way the product has performed with the way our customers have have performed with.

And again as Ben ended his comments around risk management.

We're very bullish on Sen leverage over the long term and again, we don't we don't have any control over how our customers use the product in terms of when they are in their lines and.

When they're not.

But what what we do know is is that as as there is you know as theres been some areas of risk that have popped up in the broader ecosystem in and.

You know everybody knows the the old metaphor about when the tide goes out.

You know, we were actually having increasing conversations with with potential borrowers institutional borrowers who are looking at the fact that we don't re hypothecate the bitcoin collateral there.

That we have a network of custodians for them to choose from in order to you know to place the collateral in support of all of our loans to them and so this is this is a product that you know and we've been saying now for the last two years ever since we launched it that we were going to take it slow.

And that initially now specifically to your question initially.

Initially we had thought about this is as a percentage of our capital in terms of the concentration level.

You know or as the product performs and as we get more data.

It does give us increasing comfort to extend that but we don't intend.

To go Crazy with this you know I don't think you're going to see this as as you know multiples.

High multiples of our capital base.

We'll continue to just use prudent risk management and in the way, we think about the concentration level and I'll just go back and restate, what I've said many times before.

Bitcoin is a digital bear asset.

It is an asset that trades 24, seven and so when our customers lock up their bitcoin with one of our custodial partners. So that we have access to be able to sell that bitcoin should we need to.

And then we think this is this is some of the best lending we've ever done as we stated in our you know in our earlier comments.

We have not yet had to force liquidate any of our customers and that's because we are always in an over collateralized position and win when they want to access the additional collateral that they pledged with us.

Or are there areas of their business they pay down their loans proactively. So we're very excited about this product going forward.

Perfect. Thank you. Our next question comes from Michael Perito of <unk>. Please go ahead.

Hey, guys good morning.

Hey, Mike I wanted to not to beat a dead horse here, but just on the deposits you know I think there's been a lot of commentary around what the performance wasn't a quarter or you know how it's difficult to guide for it but I was wondering if you could give us a little.

Maybe these are just the conversations I'm, having but I think there is some perception that you know a lot of the deposits are all really kind of you know.

Crypto hedge funds or investment vehicles in exchanges and then obviously you guys disclose some of that breakout, but as we think about the pipeline and some of the opportunities for growth moving forward. If we just forget about numbers for a second just in general you're seeing more corporations Big Tech launch digital asset projects doing these things and I was just wondering if you guys could spend a minute talking about some of the maybe the deposit growth.

Fortuity that that arent necessarily just crypto hedge funds and exchanges right that that could maybe be a little less correlated with the volatility of the crypto assets, but but still be meaningful opportunities for you guys over time.

Yeah, Mike I'm going to kick that one over to Ben as well for a little bit more market color.

Yeah. Thanks for the question, Mike So I mean, one of the one of the areas that we.

We saw some attention during the quarter was in the area of stable coins.

We.

As we've talked about in the past with the assets that we acquired from <unk>, We believe that the technology has the ability.

Blockchain itself has the ability to be used for payment.

Payments.

And if it's going to be used for payments in a commercial setting and in commerce and in remittance.

You really do need to have stable value.

Which is.

Totally different than the promises or.

Or the use case for for Bitcoin and other digital assets that are potentially being more speculative in nature.

So as we continue to think about building out that technology and that payment system.

I think we do you know.

And launching a stable claim later this year.

We see that as a potential driver.

For core growth in deposits.

That said you know.

And as we've said in the past we continue to bank.

Regulated.

U S dollar fully back.

Projects that are that are in the space.

Those business models today rely on.

On the issuer, earning a yield and we continue to not pay.

Any interest on on those deposits. So we've actually seen a bit of an outflow from stable coin issuers.

This year.

As they've looked for reserves and as rates have risen and as we've you know.

To the point of we're not going to pay interest on these deposits. So.

So there's a couple of puts and takes here.

What those existing stable quint issuers like about silver again is the <unk> network and the $24 seven ability to to get between dollars and a bank account in dollars on the blockchain. We don't think that that's going to go away. We want to continue to be the transactional bank for those projects.

But as we look into the future. We really are excited about using this technology for <unk>.

For payments and we think that that will ultimately.

Drive deposits in the medium to long term.

Helpful. Thank you and then just a quick follow up for Tony kind of in that light. Just you know the the 16 million for every 25 basis points, you know that was down a bit quarter on quarter, presumably because of the change in earning asset mix, you know little lower cash balances versus the securities book, obviously that.

The NIM on an absolute basis, but just wondering if you guys could provide any color on how you're thinking about managing the earning asset mix of the balance sheet moving forward here as rates continue to move higher is it fair to think you guys might try and continue to keep the cash at lower levels and put some money to work in the in the bomb book or were there. Some other fluctuations that might have impacted the mix this quarter that.

Normalize in the near future.

Yes, thanks for the question Mike.

As you as you indicated we did put a lot of liquidity to work during the quarter. So.

That's definitely.

Contribution.

Looking out I think.

The mix will depend on the evolution of the balance sheet.

Going forward.

In the short term.

The profile of the <unk>.

Just earning assets.

It's pretty consistent to what it was last quarter. So we've got 55% of our securities at floating rates.

8% of our loans are floating rate so we're definitely.

Sensitive.

Going forward in the short term.

And in the long term.

No.

We will evolve.

Interest rates increase.

Yeah.

The net interest income is increasing by quite a significant amount, but on a slightly decreasing scale.

And in part.

Potentially some derivatives as well.

He is.

Protecting some of the downside risks.

He might put in place so I think we.

We are.

We're pretty proactive on managing the balance sheet.

But again.

It's as we've.

On the deposits.

It's difficult to predict.

And if.

If you give guidance on.

To happen so we try to just.

We stay flexible stay nimble.

Forward.

Thank you.

Next question comes from Jared Shaw at Wells Fargo Securities. Please go ahead.

And good morning, everybody.

Maybe on the stable coin initiative, if you could share with us any updates any.

Updates.

During the quarter or whether it's from federal regulators and then what should we be looking at in terms of milestones.

To do this rollout going going forward for the rest of the year.

Yeah I appreciate that question I'm going to turn it over to Ben and just a second but.

As we mentioned.

Still on track for getting a stable coin issued by silver gate into the market.

By the end of this year.

And you know we we.

We typically don't don't comment on conversations with regulators or those kinds of things and and and I don't know that there would be any specific milestones that you would see.

Prior to.

Prior to the launch but.

You know maybe banking can give just a little bit of an update on.

What some of the work streams are.

That better in process Ben.

Yeah. Thanks, Alan So yeah, as Alan mentioned, we won't be providing milestones or guidance as we as we look to roll this out and we will be rolling it out.

As a pilot as we do with anything.

We ultimately do think that.

The best way to scale, the fastest way to scale is to roll it out through a pilot and really demonstrate success.

Along the way and you can see that that's consistent with what we did.

And Sen leverage when we rolled it out in the first part of 2020.

With the sand when we rolled that out back in in 2017.

I think one of the things that became apparent to.

To the world.

This quarter, what's sort of the difference between.

Fully reserved U S dollar back stable coins and other stable coins they might be back by.

Supply and demand curves and the algorithms.

Or or.

Or other assets that arent U S dollars or U S dollar equivalents and so.

Overall, we think that you know.

As.

As regulators and politicians become continue.

Continue to be more educated on the differences within the stable coin.

Environment that this is a positive for silver Kate.

As we've said from the very beginning.

We're looking to.

Offer the stable coin in a fully compliant safe and sound manner, where the reserves are invested in a way that makes sure that when token holders bring those stable coins.

To the issuer, which is over date that they are in fact able to get.

Dollar back so.

So that's I think overall a positive for what we have.

The design that we've been working on for the past year and a half.

And.

As Alan mentioned, we continue to be committed to <unk>.

<unk>.

The U S dollar back stable coin.

In 2022.

Great. Thanks, and then I guess, just finally could you just give a little color on securities that were purchased this quarter in terms of.

Duration and yield and what Youre looking for there.

Sure.

Actually during the quarter.

Yes.

Given given the size portfolio.

We purchased.

So about $140 million of securities and we sold about $75 million of securities. So.

Very.

Small deal activity in relation to the size of the portfolio.

So no real change to the.

Originally from portfolio and as I indicated previously.

The mix of floating rate.

Versus fixed rate.

Gains at around 55% floating rate.

Again consistent.

At the end of the first quarter.

Thank you. Our next question comes from Amanda then Ghazaliyah at Morgan Stanley . Please go ahead.

Hi, good morning.

So yeah, just a follow up to what do you said a new customer. That's you know I think you grew new customized quite nicely this quarter.

Any any changes in the margin on what you're seeing from new customers.

Just given that you mentioned that clients typically take time to get ready to trade and you'll probably see the deposit growth follows new customer growth with a little bit of a lag.

Are you seeing new clients being.

More watchful in putting money to work you know, maybe just waiting until the recent volatility a bit or.

Is there more interest just given the volatility and given the potential opportunity that we're seeing in the space.

Yes, I appreciate that question. It's it's a really difficult question to answer when we think about trying to compare them.

No no new activity from new customers versus what we've experienced with new customers in the past because each customer is different each customers coming in with their own strategy.

While they are likely.

Coming to us because of the sand and they want to be connected to two other participants in the network. They they just each move on their own timetable and and so it definitely gives us confidence as as we said earlier given the number of clients. We added during the quarter plus the number of prospects who are still actively.

We engaged in.

In various stages of onboarding that over time.

The client.

The client base is going to continue to grow the number of.

Send transactions.

Transaction volume over the sand will certainly experience volatility, but it should generally be up into the right. When you look at this over over periods of quarters and years, rather than in weeks and months, but unfortunately, it's just really difficult to compare.

A current snapshot versus some time in the past because there's just so much volatility in this ecosystem.

Okay fair enough.

Then just on Sen leverage.

Given the interest that youre seeing in the product and the volatility and bitcoin that we've seen.

How are you thinking about underwriting that goes towards that portfolio have you made any revisions to the rates that you charge the ltvs or the customers you are dealing with are you putting on any limits on any.

Any size limits on that portfolio.

Yeah, I'll I'll address some of those questions and then.

I'm going to turn it over to Ben and a second to just provide a little bit more color on the different types of customers.

We're engaged with with which might provide some additional color to your question, but the short answer is we're not making any changes to how we underwrite we believe that we have when we set this this product up appropriately before we even launched the pilot in the beginning of 2020, we had been looking.

<unk> at the volatility the historic volatility in this asset.

Talking specifically again about bitcoin.

The the large swings in in prices.

Essentially that underlying volatility and all of that went into to inform how we designed the product in terms of the ltvs the interest rates.

And then you know the levels, where we might require.

A collateral coverage true up you know a K, a a margin call and and so and then as Ben mentioned when we launched the pilot we ran that pilot for nine months and you know the first the entire first year, we probably had less than $100 million outstanding at any one time versus now.

You know two and a half years after the launch we have commitments of $1 4 billion. So we're very confident with the way we've set up this this product and Ben do you want to talk a little bit about the different types of customers who are using the product.

Yeah, Yeah sure thing so.

I think.

Everyone is sort of familiar with the large loan that we put on earlier in the year that was a it was a term loan it was fully drawn in the use case there was really around.

Treasury management this particular client.

Wanted to add.

Additional bitcoin to their balance sheet.

From a from a treasury management perspective.

And we were able to make a term loan when we.

When we launch the product back in 2019 that use case it wasn't it wasn't even on our radar back then there was a lot of.

The primary use case was around trading and folks that were arbitraging the spot market.

And the and the futures markets through the basis trade.

And so you know.

It is and so <unk>.

Continue to go through the same process as we as we always have which is to talk to our customers.

Understand what they are what their needs are.

And try to try to deliver that product to them in a way that you know.

It creates an outsized return.

I'll still managing the risk and so.

I wouldn't say that we've seen any shift really during during the quarter.

Early in the quarter when balances were above $700 million outstandings were above $700 million.

We felt really good about that.

As a reminder, we're charging typically between 6% to 7% interest rates on that and they're variable rates.

And so the risk return profile there we feel really good about and we were excited about the fact that it was growing above $700 million earlier in the quarter.

As some of the liquidity events happened during the quarter from various industry participants and.

Contagion sort of correct in we were actually excited about the fact that balances decreased to 300 million or close to $300 million, which is where they were at the at the end of the quarter. So I think we're at a stage where the broader industry is sort of catching its breath.

And reevaluating.

When they want to put risk on in and take risk off.

So and I think you saw that in the growth in commitments during the quarter. So as Allen mentioned in some of his earlier comments.

We couldnt be more excited about this product.

It performed as we expected and you know these are always significantly over collateralized loans, where we're holding the collateral and we can liquidate it if we need to so.

We think that Outstandings will.

Should hopefully ramp up.

In the second half as our clients kind of get there.

Get their feet underneath them and figure out where they want to put risk on.

And so overall, we couldn't be more pleased with with its performance.

Thank you. Our next question comes from David Kevin Rainy at Wedbush Securities. Please go ahead.

Hi, Thanks, I had a follow up on the stable quaint initiative do you feel enough regulatory guidance has been provided already such that you may be able to launch the pilot even without any additional regulatory updates.

Yeah, Dave I'll I'll I'll take this one.

So as we've discussed in the past.

We we started down this path.

Looking at issuing our own stable coin from the perspective of.

Would it be legally permissible for us to do so.

And we we did the legal analysis. This goes back a couple years now we engaged with the regulators and we came to the conclusion that it is in fact legally permissible.

And the guidance the President's working group report that was issued on November one of last year 2021 reinforced that belief that that in fact, it is legally permissible and in fact there.

That report indicated a preference or stable coins to be issued by insured depository institutions and so you know the.

In terms of is there additional regulatory guidance that's needed. We don't believe so it's it's really all about the.

The design of the product.

You know who is going you know who's going to use it in the pilot et cetera, and so those are all things that we're working on and we're certainly engaged with our regulators as as we design the product, but we don't believe that there's any.

Specific guidance. That's that's needed will continue to take into account the guidance that comes out as it's issued.

But we're moving forward based on on the guidance that exists in the market today.

That's great very helpful. And then my follow up is on rate sensitivity. A question that I've been getting is have you considered swapping out some of your rate sensitivity to lock in higher rates.

Yeah.

OLED <unk>.

Yeah, I'm sorry, Tony go ahead.

Sure.

David Yes.

Like I said in my previous comments.

We will continue John disclosure.

Q, but we do we have in the past used to Rudy vision.

B we would.

Certainly considering them as part of the strategy going forward to manage interest rate risk. So.

We will provide.

Closure on going forward.

Definitely the case to manage interest rate risk. So thanks for the question.

Yeah.

Thank you.

Our next question comes from Steve Moss of B Riley Securities. Please go ahead.

Yeah.

Okay.

Most of my questions have been asked but just maybe following up on the competitive environment just kind of curious.

What are if any pressures clients here as you've had more entrants.

Other banks into the space are you seeing splitting of any deposit balances or any clients, becoming more centered around fees.

Okay.

Any color along those lines would be helpful.

Yes.

The short answer is no we haven't seen any.

Any pressure on fees.

I think one thing that we should all kind of acknowledges that the second quarter was.

It was a quarter of significant stress market stress and volatility.

And and so I don't think.

Our customers were really focused.

So much on how much interest are they earning or how you know how much are they paying and fees. They they were.

Very focused on managing their own risk and.

And unfortunately as as we said already.

You know they they were very reliant on the 20 $473 65 uptime that the silver Gate Exchange network provides and then equally important the network.

Of of Counterparties, with whom they do business I mean, the the thing that attracts people to silver gate is this network effect every time, we add a new customer we are not only do we create value for them, but we create value for every other participant in the network because they now have another counterparty.

To trade with and and so.

This is one of the things that sometimes gets lost when you have these periods of market stress, but the fact that if you're a participants in this ecosystem.

You want to be where there's the most.

Hi, its access to liquidity and candidly in the ecosystem that that silver agape and being and being a participant.

Alright, great. Thank you very much next quarter.

Thank you.

Okay.

Thank you. Our next question comes from Jason Valley at Canaccord. Please go ahead.

Hey, guys good morning.

This quarter here amidst the volatility and nice to see a stress test of the model and it coming out shining just a question here on the Sen as it relates to the rollout of your stable coin here in the second half and maybe the <unk> roadmap.

Then it does it make sense at some point to kind of block chain enable the cents.

Specially if youre going to have your own stable coin to be able to kind of more tightly integrate the sad to your own stable coin and then I'll have a quick follow up.

Yeah, Joe I'm, just going to go ahead and ask Ben to take this really appreciate the question and it is an important distinction.

As it relates to the stand which is currently not a blockchain.

But but yeah, Ben do you want to do you want to go ahead and comment on that.

Yeah, Yeah. Thanks for the question Joe So.

As we.

As we've as we've said before the solutions that we build are really are really driven by our customers. So as we're talking with our customers.

And we're under we're understanding their businesses and.

How we can add value for that and how we can solve problems for them.

That really informs.

The roadmap for the Sen and for the block chain solutions that we're looking at.

As you as you alluded to.

We made the acquisition in the first quarter.

We certainly see the benefits of.

A blockchain based payment systems, and the ability to transfer value to.

$24 seven around the globe.

One of the great things about it.

I think Alan explained the benefits of ascend to the to the users and the benefits of silver data is that you need to be a silver gate customer in order to participate but as we continue to think about the future think about the future of payment systems the ability to transfer value.

Around the globe 24, 7% over blockchain system. So something that we think is is really important so.

More work for us to do in that area.

But definitely something that we're looking at and talking to our customers about.

Great.

That's great and then just you know your risk management did really well in the quarter was there.

Is there anything else to sort of provide any color there.

Did you tweak your model at all any update to two the risk management methodology that you know from any learnings coming out the other end of at least this.

But you know the quarterly volatility thanks, a lot guys.

Yeah Joe.

Again, the short answer is no. We didn't we didn't have to make any tweaks at all.

One thing that that we have done since the market has calmed down a little bit is we've gone back and we've we constantly update.

You know kind of the historical experience.

Of the.

The significant drawdowns in the price of bitcoin and the volumes and and you know.

How does the price respond act over a 24 hour period, a 48 hour period 36 hours et cetera.

But so our risk management processes are constantly looking at how the market performs but.

<unk>.

We've not seen anything so far that would cause us to have to make any tweaks whatsoever.

And again this is one of the reason that bitcoin only a bitcoin as everybody on the call is probably aware has has been lives since 2009.

And putting aside the price for a second the protocol itself has been operating with zero downtime since 2013 since before we got into the ecosystem. So the bitcoin protocol just continues to Hum along.

Generating blocks, roughly every 10 minutes to everything's working and and so from our perspective, we certainly look at price action.

And we want to constantly make sure that that.

Our risk management practices are sound and so far.

So far theres been no need to make any changes whatsoever.

Great. Thanks, guys.

<unk> performance.

Thank you.

Thank you.

Our final question comes from George Sutton of Craig Hallum Capital. Please go ahead.

Thank you and just underlying some of your points L and a $350 million of Bitcoin just traded really didnt move the market. So that's a pretty impressive. So your professional services quarter over quarter grew from 3 million to $6 3 million, obviously significant percentage sequentially can you talk about.

The deployment of those dollars relative to the stable point project.

Yeah. Thanks for the question George I'm going to turn it over to Tony to dive into the expenses a little bit more.

Yes, thanks for the question George.

Actually the increases.

There are certainly elements in there.

D.

Theres a combination of factors go into the professional fees.

Mike.

As you said.

It's a relatively big change, but in the Grand scheme of things.

Thank you.

Okay.

This move around the overall P&L, but we did continue to invest in statements <unk> infra.

Infrastructure projects.

But we've also used.

Third party.

Third party fees or for other things.

Like legal costs and recruiting costs.

Curious if other things as.

As we continue to kind of scale up and so.

There's a bunch of things in there.

But certainly the biggest component is.

David Cohen infrastructure.

Gotcha. Okay. Thank you and then lastly, this crypto environment is obviously, creating dramatic winters and dramatic losers, you're clearly on the winning side and Ben had mentioned being a product driven company I'm curious how much out of the box you're thinking or looking for these opportunities.

This environment to really build up the transactional revenue side of your ecosystem.

Yes.

Yes, George that's that's a fair question.

Ask Ben to comment on it but I'll just start by saying that that we take a very long term view them as we've demonstrated in the past by the development of the Sen the launch of the.

Euro cents earlier this year the launch of Sen leverage.

So we don't typically you know we're not chasing the.

The latest hottest thing.

The market that might come and go such as Icos, a few years ago or defy or in Ftes.

We really stay in our lane as it relates to what we can do as a bank.

But with that as an overview.

Ben Ben Congest provide a little bit more color on.

On how we think about it.

Yeah. So.

Consistent with what we've said in the past.

We are we do we do get a fair number of looks at different M&A possibilities. If you will.

Really acquisition targets.

The.

And for US the strategy really hasn't changed.

George as you mentioned.

We do look at acquisitions through the lens of product.

And what are the things that we could do to.

Continue to solve problems for our customers.

Understanding our existing product suite and.

Wanting there to be sort of tied into great integrations between the products that we offer.

We might add on to that and so I think the blockchain assets that we acquired earlier in the year were good example of that.

The reality is is that there's just not really that many.

Kind of opportunities out there to do that.

But nonetheless, we continue to be open to.

Looking at things and whatnot.

I think for US the strategy remains the same.

And so don't really expect anything different in the second half of the year.

Alright, thanks, guys.

Thank you. This concludes our Q&A session I would now like to pass back.

At a name for any final remarks.

Alright, Thank you and thank you all for joining US today as we said many times on today's call. We're incredibly proud of our results this quarter amidst the challenging backdrop I'd like to thank our team had silver gate for their continued hard work delivering valuable solutions for our customers and as we move through the remainder of 2022.

Two we're excited about the opportunities that lie ahead and will continue to take a prudent approach to risk management, while continuing to innovate we look forward to sharing additional updates with you in the coming quarters. Thank you and have a great day.

Thank you everybody for joining today's call you may now disconnect.

Uh huh.

Okay.

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Yeah.

Yeah.

Okay.

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Yeah.

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