Q3 2022 Silvergate Capital Corp Earnings Call
Against this backdrop silver gate delivered record net income available to common shareholders of $46 million.
An increase of 13% compared to the second quarter, driven by our diverse revenue streams and progress on our strategic initiatives.
Before I dive into our results.
Want to provide some color on the broader digital asset ecosystem.
In the third quarter bitcoin hit its lowest price and market cap of the year.
We have not seen these levels since the fourth quarter of 2020.
At that point in time, Silver gate had fewer than 1000 digital asset customers.
$2 $6 billion of average digital asset deposits and only $59 billion of spend volumes.
By contrast, this quarter, we have more than 600 customers.
Average deposits of $12 billion and sand volumes of 113 billion.
Which is a testament to the strength of our platform over the last two years and the dedication of our team.
As we've done in the past we worked with coin metrics again this quarter to better understand how activity understand correlated with the broader digital asset industry.
According to their data in the third quarter, both bitcoin and Ethereum dollar trading volumes increased compared to the second quarter.
The fed saw lower daily trading volumes this quarter with transfer volume of 113 billion.
A decrease of 41% on a sequential basis.
Volumes were mainly impacted by trends in the broader industry, specifically within stable coins as volumes from stable coin issuers, such as USB C.
Sizable drop in market cap during the quarter.
It is important to note that the correlation between the fed and the industry won't always be linear.
Given the different use cases of discern.
We remain confident in the power of the platform and the opportunities for expansion within the network.
Now moving to our key metrics.
Average deposits from digital asset customers declined to $12 billion in the third quarter compared to $13 $8 billion last quarter.
Importantly, we saw the range of deposits during the quarter narrow to a high of $14 billion and a low of $11 1 billion.
Signaling lower volatility in our deposit base.
The number of digital asset customers continued to increase reaching 1677% in the third quarter.
An increase of over 350 customers since the same quarter last year.
We added over 90 clients on a sequential basis as we continue our focus on adding high quality clients that bring the most value to our platform.
Our pipeline of potential new digital asset 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 9% to $1 5 billion compared to $1 $4 billion at the end of the second quarter.
In addition, we experienced a range of outstanding Sen leverage balances during the quarter between $268 million and $322 million with an average outstanding balance of $308 million.
All of our sand leveraged loans continued to perform as expected with no losses are 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 as collateral to comply with the terms of their loan agreement 24 hours a day seven days a week.
Finally, I would like to provide an update on the progress we are making towards our strategic initiatives.
We continue to balance our culture of innovation with our prudent risk based approach to launching new products.
And are actively engaged with regulators and policymakers in anticipation of launching a regulatory compliant token is dollar on the blockchain.
Unfortunately, we no longer expect that to happen this year.
That said, we remain committed to bringing blockchain based payments to our customers in a regulatory compliant manner.
And we will continue to provide additional updates on this initiative and the other exciting opportunities being explored by silver gate in the coming quarters.
While we are taking a balanced approach.
As you can see on slide four.
The opportunity ahead remains massive.
We believe silver gate is one of the best positioned in the industry to both power of the current one trillion digital asset market and disrupt the 67 trillion global commerce market with a blockchain based payment solution.
As the digital asset ecosystem continues to grow and evolve we will continue to take a customer first approach to product innovation.
In line with this approach I am pleased to share that in the fourth quarter, we will introduce updates to our customer support model to provide our customers with support 24 hours a day seven days a week.
We already offer real time payments with $24 seven availability through San and Euro Sam and.
And we have maximized payment windows to give our customers increased opportunities to execute their banking activities when it's convenient for them and.
Enhancing our existing customer support model will be incredibly meaningful for our customers who work in digital assets.
Which is an industry that operates without time constraints or geographic barriers.
Finally earlier this year, we announced the launch of the Euro cents, which enables customers to transfer euros in near real time 24 hours a day seven days a week.
This quarter, we gained momentum on this platform with the rise in ECB rates and in turn customers held more euro deposits.
This technology is just one example of our ability to provide products that meet our customers' needs.
I am proud of the progress we made this quarter against our strategy and look forward to what's to come as we close out 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.
Starting on slide five with our key financial results.
Against the challenging backdrop and the overall digital asset industry Silver gate reported another quarter of record net income available to common shareholders.
<unk> $40 6 million or $1 28 per diluted common share.
Compared to $35 9 million or $1 13 per diluted share in the second quarter.
And up from $23 5 million or <unk> 88 per diluted share in the third quarter of 2021.
Revenue of $89 3 million was up 12% compared to the second quarter and up 73% compared to the same quarter a year ago, driven by higher net interest income, which I will discuss in more detail later on.
We maintained strong capital ratios during the quarter with our tier one leverage ratio of 10, 71% an increase of 7% compared to last quarter and 23% from the third quarter of 2021.
Next on slide six average digital asset customer deposits were $12 billion in the quarter down 13% compared to last quarter.
As Alan mentioned, we saw lower volatility in our deposit base has the range of deposits during the quarter narrowed within a high of $14 billion.
To a low of $11 1 billion.
Our weighted average cost of deposits for the quarter increased slightly to 16 basis points compared to essentially zero last quarter as we utilized short term brokerage certificates of deposit as part of our liability management strategy.
The annualized cost of digital asset deposits remained at zero, reflecting our digital asset deposit gathering strategy.
Turning to slide seven net interest income was $80 9 million in the third quarter an.
An increase of $10 3 million compared to the second quarter.
$43 2 million compared to the third quarter of 2021.
As we continue to benefit from our asset sensitive position within a rising interest rate environment.
Net interest margin was 231% for the third quarter compared to 196% in the second quarter and 126% in the third quarter of last year.
The increase in NIM from the prior quarter was partially mitigated by the impact of derivatives as we increase our focus on managing down rate interest rate sensitivity.
Our securities portfolio totaled $11 4 billion with a yield of 221% for the third quarter down slightly from a balance of $11 8 billion at the end of the second quarter with a corresponding yield of 166%.
Year over year Securities increased $4 2 billion.
As part of our risk management strategy, we hedged approximately 40% of our interest earning assets to reduce interest rate risk.
Moving onto the loan portfolio.
On a year over year basis, total loans were down $235 8 million.
14% as we continue to divest our one to four family multifamily and commercial real estate loan portfolios.
During the quarter, we sold $3 6 million or one to four family real estate loans and transferred an additional $33 9 million or one to four family real estate loans to held for sale.
As a result, the allowance for loan losses decreased to $3 2 million from $4 4 million in the second quarter.
As we discussed last quarter. We are currently operating in a rising rate environment and silver gig continues to be well positioned for further rate hikes as.
As of September 32022, approximately 63% of our interest earning assets were adjustable rate to.
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 $60 million over a 12 month period.
Turning to slide eight noninterest income for the third quarter of 2022 was $8 5 million, which decreased <unk> 8 million compared to the prior quarter and $5 6 million compared.
Compared to the third quarter of 2021.
The decline in noninterest income on a year over year basis was primarily due to the gain on sale of securities recognized in the prior year.
Slide nine shows noninterest expense for the quarter of $33 2 million up $2 6 million from the prior quarter and $10 8 million compared to the same quarter last year.
The increase in noninterest expense compared to the second quarter and prior year is primarily due to increases in ongoing investments related to our strategic growth investments.
We will continue to make strategic investments during the fourth quarter to support our growth initiatives.
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, so we may come in towards the low end of this range.
Overall I am proud of our results this quarter and remain confident in our trajectory through the rest of 2022.
With that I would like to ask the operator to open up the line for any questions operator.
As a reminder, if you'd like to register a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two please ensure you're muted when speaking and please limit yourself to one question and then additional follow up.
Our first question comes from Manav, because alia of Morgan Stanley . Please go ahead.
Yeah.
Hi, good morning.
Good morning, just on.
Just on the.
The <unk>.
Platform and the volumes there.
I know the volumes are down 40% Q on Q and I hear you that.
Stable coin is.
What was the big driver of that.
I guess the question is is that a function.
The greatest stability in bitcoin prices in the past quarter relative to.
<unk> and do you think that if we see a rebound in volatility.
In bitcoin and other crypto prices do you think we should expect a similar rebound in San transfer volumes or.
Just wanted to get your views is it is it a function of liquidity, becoming more scarce interest rates going up.
Do you think we're at a new normal for Samsung for volumes.
Yeah.
So.
I'm going to ask Ben to comment a little bit more in just a minute on kind of some of the broader things that drive sand volume, but as as we've shared in the past.
The the power of this then is is really best demonstrated when there is a lot of volume and volatility in the price of bitcoin and the other digital assets.
And we certainly saw that in the second quarter. When there was a lot of volatility with some of the leverage unwind in the ecosystem and then to your point as as volumes across the broader ecosystem com.
Calm down a little bit and we've seen the volatility for instance, incidence in the price of Bitcoin has has come way way down.
And so that just provides less trading opportunities for a lot of our customers who use the sand.
But.
We should also point out and this is where I'll ask Ben to comment.
On the fact that that it's really difficult to pinpoint exactly where the volumes come from.
And.
Look for correlations with the broader ecosystem because there are so many different drivers Ben do you want to add any comments to that.
Yeah, Thanks, Alan and thanks for the question.
Yes, that's exactly right I mean when when.
Previously, we had reported using coin metrics data and specifically we were using the trusted exchange volume data.
And when you look at that trusted exchange volume data I think there's about 15 exchanges are so that make up that that data set and as you know we have over 600 customers.
Silver given the digital asset ecosystem, we first introduced that metric back kind of in the middle of a bull market and now we're in a bear market and.
So.
And so we saw that sort of.
That lack of correlation in those two numbers this quarter.
That said there were.
Several other reports out there about volumes being flat quarter from one quarter to the next.
But I think the initial part of your question exactly nailed it which is we haven't seen.
We haven't seen price volatility this quarter.
And at this level for for two years now.
And so that is that is probably the most significant driver.
But.
Back to the point there are multiple uses for the sand, including Steve.
Stable coins, which were down pretty dramatically this quarter. So.
Overall, not that surprising given the macro backdrop.
Got it and then maybe as a follow up could you talk a little bit about how youre thinking about the balance sheet, especially as we go into 2023.
You brought on some brokerage Cds and <unk> funding during this quarter.
Wanted to get a sense, if you're managing to a specific balance sheet size or a cash level.
I guess the question is why not let some of the shorter dated securities run off on some of the deposit clients.
Yes, it's a great.
Al.
Yes, Im sorry go ahead, Tony I was just going to kick it.
Thanks, Alan sorry to jump in thanks for the question.
Yes, we so.
The strategy on the balance sheet side.
How does it really changed.
We.
Where.
The composition of the balance sheet between the end of the third quarter and the end of the second quarter.
Relatively consistent and as you indicated we did we did use some short term wholesale funding.
Yes.
<unk> and.
We maintain a relatively stable level on the asset side.
But we.
It would have seen.
There has been some amortization on the securities portfolio, but by and large where we are.
We're happy with with the performance of our investment portfolio.
And so.
We're.
Yes.
We've kept stability on that portfolio during the quarter.
Great. Thank you.
Our next question comes from Steven Alexopoulos of Jpmorgan Steven. Please go ahead.
Hey, good morning, everyone.
I wanted to start in terms of delaying the rollout of a stable point. This year is this tied to a regulatory hurdle as a technology hurdle can you give more color there and is there an updated timeline.
Yes, good morning, Steve I appreciate the question so far.
First and foremost I will say that.
Certainly not.
A technology issue.
The technology that we acquired earlier this year was ready to go when we acquired it.
And so it really is.
As I said in some of my prepared remarks.
It's working with with the regulators and with policymakers and just making sure that we've got this right.
We still feel very strongly that that we are in the best position of any other bank out there to launch a regulatory compliant safe and sound token is dollar on the blockchain and and.
We're not in a position at this point to provide an update on the timeline.
But and we're certainly disappointed that it looks like we're going to Miss our goal of launching it this year, but.
That you shouldn't read anything more into that in terms of.
We continue to build the operational muscle internally.
The regulatory compliance and muscle.
Just working really closely with the regulators to make sure that that when we launch something that we don't.
We don't hit any speed bumps along the way.
Okay. That's helpful. Alan.
In terms of a follow up so if we look at the digital asset deposits of $12 billion average could you give us a sense how much of that is related to stable claim volumes at this point and do you see balances, they're stabilizing and this $11 billion to $14 billion range or is there still more downside.
Yes.
Take the second part of the question and then kick it to Ben for the for the stable coin portion but.
In terms of.
Do we expect to see stability going forward I mean, the one thing we've learned having bank this ecosystem for.
Almost nine years now is is that this is one of the reasons, Steve that we don't provide guidance because it's just really difficult to predict the future what I will say, though.
I've made this comment in.
The past few months.
The the drawdown in deposits.
Given the broader crypto currency bear market combined with the macro backdrop.
The drop in deposits is not surprising and in fact, if you go back and look at the last time, we experienced a beginning of a bear market, which was in 2018, we saw very similar.
Activity on the deposit side with with with a drop from the high too.
A drop of about 12% 13%.
Going from kind of the peak in the first quarter of 2018 two.
The second quarter of 2018.
And then things kind of stabilized and.
And I'm not predicting.
That is going to remain stable now I'm, just kind of pointing out what we experienced the.
The last time, we went into a bear market.
But importantly back then we continued to add customers.
We're just starting to drive adoption.
And we're doing the exact same thing now is as we pointed out we've added over 90 customers.
In the third quarter of this year and our pipeline remains every bit as strong as it has been all year and so.
What we hope to see is as you mentioned stability in the deposits, while adding additional customers. So that we continue to prepare for the next.
Kind of.
Turnaround in the market, but let me ask Ben to comment on on the stable coins.
Okay. Thanks Alan.
I think in the in the quarter between Q2 and Q3, we saw the the total market value of USD <unk> declined from $55 billion 47 billion, which is about a decrease of 15%.
Silver get average deposits were down about 13% or so.
So that's.
That meaningful just from a directional standpoint recall that silver gate as the transactional bank for the regulated stable Quint issuers that are out there so that when new stable coins minted or or burned that activity often happens over the <unk> network.
Because it's 24 hours a day seven days a week in real time and so.
Nothing has really changed for us in terms of being the transactional bank for for those platforms.
And we've always encouraged our customers to take their sort of excess deposits. If you will lead the deposits that they don't need for issuance and redemption to other banks that do pay interest and we really haven't seen anything.
Anything changed in that realm over the quarter, but we do think that the decrease in overall market cap.
Maybe a validation of sort of a broader macro trend and also reflective of what we're seeing in our from our customers. So.
But that's how we think about that.
Okay.
Thanks for taking my questions.
Our next question comes from Dave Rochester of Compass point. Please go ahead.
Hey, good morning, guys.
Just wanted to ask a quick one on the hedging.
And can you just talk about what you've added this quarter and the terms on that some of that forward starting at all I know you've got some and so in the Q, but just trying to figure out what's new and then what's the trajectory or the plan on that hedging going forward.
Yes, im going to let Tony.
Take this one David I appreciate the question I'll, just say upfront that.
As you pointed out with the second quarter here.
There will be additional detail.
In the third quarter Q when that comes out.
So not not sure how much more.
We can say at this point, but Tony do you have anything you'd like to add to that.
Yes, so Dave just in response to your question.
The hedging.
It kind of takes two flavors, but part of it is is hedging for rates down.
And then part of it is is some hedging related to the fair value of some of the fixed rate portfolio. So.
As we provided in the.
In the earnings deck.
The aggregate hedges totaled about 40% of.
Of interest earning assets.
It's made up of a combination of those two flavors.
And.
The bulk of those hedges were put on.
During the second quarter.
So our asset sensitivity is has remained relatively consistent between the end of the second quarter and the end of the third quarter.
And as Alan said, we will provide more details in the queue.
Thanks for the question and then any thoughts on the go forward are you are you. Good for now are you thinking about layering more in over the next couple of quarters. How are you thinking about that and where does it stop.
I mean, you hit neutral or we remain asset sensitive.
The end of it.
Yes, I think I think the current.
We're observing like everyone else pretty volatile macro environment, So we're going to.
Yes.
Nothing to update at this time, but we're continuing to evaluate and monitor.
The macro environment and our posture on our balance sheet.
Okay. Thank you guys.
Our next question comes from Joseph <unk> of Canaccord Joseph The line is yours.
Hey, guys good morning.
Just a couple for me, maybe we could circle back on the stable coin initiative, just a little bit more I mean, there there clearly are other.
At least.
Decently regulated stable coins that are out in the market. Today I know you are really focused on something for commerce.
And so if you could kind of maybe provide a little more color here on perhaps some of that regulatory and policy work you're doing is it specific to e-commerce related activity with the stable coin or is it just.
Kind of more full regulatory compliance perhaps those two are the same thing and then maybe I'll have a follow up after that.
Yeah, Joe. Thanks, I really appreciate the question I'm going to ask Ben to to jump in here and talk a little bit about.
Where we are in the stable coin and then I may come in with.
With some further comments.
Ben do you want to kick us off here.
Yeah, Yeah. Thanks for the question Joe.
So I think that what's become what's become apparent is the current when you look at the current usage of stable points today in the current market cap.
It's let's call it $150 billion.
Round numbers and when you and they are used primarily for digital currency trading use cases.
For folks that want to take risk off and get value onto exchanges that don't have Fiat rails, and I think what's become clear to to regulators and policymakers is that using the technology for payments is a massive opportunity at a massive scale that really dwarfs, the 150 billion.
It's available today and so the nature of these conversations.
Really around what does this look like at scale. If there were to be let's say a trillion dollars worth of value and stable coins what type of.
Risk based approach do you need to have in place how do you invest those those funds how do you make sure that the end user when they present their token can ultimately receive a $1 back and make sure that you have the appropriate consumer protections in place and so.
I think that really that's what that's what we're seeing and that's what we're feeling from from commentary with folks Theres certainly been a lot of regulatory commentary and the general public over the last 60 days and I think it's indicative of the fact that people.
This is rare.
Relatively new technology, a relatively new concept and with just a massive tam and so because of that.
As Alan mentioned in his comments, we want to make sure that we get it right.
And we do think we continue to think that we are the best position.
Bank of anyone out there to be able to deliver on this opportunity, but Alan did you want to add anything.
No why don't we see what follow up question, Joe Joe has at this point thanks Pat.
Yeah. Thanks that makes a lot of sense to me that 150 billion on stable four.
For trading crypto trading related activity versus kind of something that.
Honestly looks and feels like M. Two money supply if it was used more broadly.
That's a big difference obviously.
And then maybe just one quick follow ups here if we.
We could focus on the customers the new customers coming on in the quarter, if we could.
Perhaps get a feel for are these newer customers or are they bringing kind of.
What kind of deposit.
Balances are they bringing in and how do we kind of.
Offset that versus perhaps smaller deposits for existing customers and kind of how to how to feel about new customer contribution to deposits versus what the macro may mean for lower deposits for existing customers. Thanks guys.
Yes, Joe that's another great question and I think Ben Ben has got some good data for you on that one.
Yes, thanks for the question Joe.
So obviously, we look at our customers deposit balances on by.
<unk> on a regular basis and I think that when you.
When you look at exchanges and institutional investors, we definitely saw outflows in the quarter and we think that those are indicative again of that lower price volatility and continuous low volumes.
As you suggested we did.
We did add.
<unk>.
90 customers in the quarter and and close to 300 this year and in 2022.
From the new customers that have kind of come on platform, we've actually seen about $1 billion in deposits from those from those customers.
And typically that will continue to grow as they finish the on boarding process and get fully integrated within.
Within the same platform. So we are seeing really good engagement really good interest from customers that are in the pipeline and that are now that have now on boarded.
Of course, that's being offset by the macro conditions in the broader.
Crypto industry.
And so.
Overall, given the state of things.
This feels sort of I guess consistent with what we would with what we would expect.
Great guys. Thanks for all that color much appreciated.
Okay.
Our next question comes from Michael Perito of <unk> W. Michael. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Just a.
Follow up.
On kind of the balance sheet strategy from here.
Understanding it's challenging to predict where deposits go but.
Maybe a hypothetical I mean, I'm just trying to understand how much of the kind of building the brokerage Cds and borrowings has kind of sustainable versus temporary as you guys see it I mean, if deposits continue to reduce next quarter. I mean, just the balance sheet start to shrink or do you guys expect to try to maintain that that really small spread in the overall.
Asset size in that scenario or is there or are you guys thinking about it a different way.
Any additional thoughts.
As we built our securities portfolio through through the.
Rapid growth that we experienced is as you may recall.
We attempted to.
While we were buying securities keep keep the the.
The majority of those relatively short.
In duration.
With adjustable rates et cetera, and so we continue to benefit.
From the rising rate environment, and even though we started to put some hedges in place as Tony mentioned in his prepared remarks, we continue to benefit.
Our earnings continue to benefit from from a rising interest rate environment, albeit at a lower <unk>.
The benefit is is slowing down having said that there's also a little bit of a lag in the benefit that we experience.
And in the rising rate environment, just based on the indexes than when the various securities repriced. So.
So we still have a little bit of <unk>.
Tailwind there.
In terms of earnings impact.
While rates are continuing to rise. So so again, we don't provide guidance Mike.
We'll we'll kind of take it as it comes.
But but it's certainly so far hasn't seem to make sense to sell some of the security that might be closer to par.
Because due to the adjustable rate nature and give up some of the.
The forward earnings potential of those same securities. So.
And with that Tony I don't know if ive.
If there's anything further that you'd like to add to that.
Yes, no I think that.
Yes.
Not much to add on that other than to say Mike.
You've seen our kind of our tier one leverage ratio, which is our kind of.
Key ratios.
<unk> is close to 11% in the quarter. So it has gone up so there's plenty of balance sheet capacity.
And.
As Alan said, there's there's typically.
A 60 to 90 day delay in the repricing of the adjustable rate securities. So.
Some of those benefits from interest rate rises even.
Even in September .
Arent visible yet on the top line. So we will continue to benefit from asset sensitivity.
Going forward.
Got it. Thank you and then just secondly.
I appreciate the color on kind of the new customer deposit balances and engagement.
As we think about how that translates to kind of the digital asset customer fee income, which was about $8 million this quarter.
Okay.
Obviously as my understanding is that stable coin related activity really doesn't impact that so is it I mean.
Did you guys see kind of this lower lull in activity this quarter, but continue to add new customers at what you guys are optimistic that maybe we could start to see that figure reversed the trend of the last few quarters of contraction.
Yes, I think Mike.
Very broadly.
While none of these metrics.
Are necessarily drivers of each other they are they are.
Fairly correlated and what I mean by that is going.
Going back to my earlier comments around San activity and.
The fact that with lower.
Trading volumes and lower price volatility that's.
That's resulted in and obviously lower sand volumes.
It's it's also.
Then.
Correlated to lower transactions.
The on ramping and off ramping up dollars with existing customers, who are wiring and in money or wiring out money et cetera, Theres just less activity. So it's really hard to predict the one thing that we have confidence in is that as long as we're continuing to add customers who are.
No.
Planning to use the sand.
As the market as the broader crypto market stabilizes.
We think the long term trajectory is is it still up into the right.
If you zoom out and just think about some of the announcements in the institutional announcements that have been made in the last two or three months or so with the Blackrock coinbase.
<unk> shipped NASDAQ announcing crypto custody visa Mastercard, just yesterday, the <unk> Mellon custody.
Announcement. There is there are just there's a lot of institutional adoption that is still coming that and none of these things are live yet they're all they've all made announcements about things to come and so we could not be.
More optimistic on the long term trajectory.
But but but these things take time to play out.
Great. Thanks.
Our next question comes from George Sutton of Craig Hallum. George Please go ahead.
Thank you.
I'm curious if you could walk through more of the same customer sizing of deposits.
With really the intention to try to understand.
And average account, we'll obviously react to volatility, but also the higher interest rate options that they have is there any way to sort of break those two apart in terms of the impact.
Yes, Ben do you want to take that one.
Yeah, Yeah, it's a good question George and.
The short answer is unfortunately not.
You know, we've we've said and we'll continue to say and this comes directly from our customers that really what they want is they want a robust trading environment with a lot of volume a lot of volatility a lot of new assets coming online.
And different different arbitrage opportunities around the globe.
As we talked about like in the second quarter. Despite all of the kind of.
Platforms that didn't perform that well because of.
No different.
Deleveraging in the system and whatnot.
That was actually a really good trading environment for our for our customers and so when they're comparing.
What they can generate from those trading strategies versus what they can earn on an excess deposits. Even at these at this interest rate level that we're at today those two things kind of pale in comparison when you look at sort of an annualized return.
So.
That said if there aren't those trading opportunities then of course, they're going to take their deposits and 300 basis points or whatever that they can earn but it's really difficult to to kind of parse those two different things and ultimately.
The improved macro environment is ultimately what we think will drive that increased engagement from our customers.
Got you.
So relative to.
The stable coin project timing.
You're certainly not the only one out there awaiting regulatory and policymaker clarity.
Is there a broader regulatory and policymaker clarity that we should be looking for that might need to happen before your project or is it somewhat independent of that.
Yes, it's really obviously.
Virtually impossible for us to comment on what others might be waiting for.
And from our perspective.
The conversations that we're having with our regulators and our policymakers.
And the broader policymakers.
Are very consistent with some of the public comments that <unk> seen out there over the last several weeks.
No nobody thinks this is going away everybody wants to make sure that that we've got all.
The industry has all the all the relevant controls in place on all the things that Ben was talking about earlier.
<unk>.
This kind of reminds me of going.
Going all the way back to the mid <unk> mid to late seventies with.
With credit cards and ft commitments.
<unk>.
As we've been working on this project over the last couple of years.
I've gone back and looked at kind of the history of electronic funds transfer and some of the things that are being brought up by <unk>.
Congress et cetera, as well as the different stable coin bills are contemplated.
The the the.
The data points are very similar and so.
I'm confident that that we're going to get through.
All of the various questions and get to a point to where we can get something in the market and as I commented on in my prepared remarks.
Go back and look at what the opportunity is here for four.
For global payments and the opportunity is just absolutely massive and.
It's also the thing that that over.
Overtime will accurately separate silver gate from these kind of micro.
Crypto market volatility if you will once once we transitioned to issuing a stable coin.
A cocainize dollar as we're referring to it on the blockchain.
And once that is used for payments around the globe that will really change the complexion of.
<unk>.
Relatively modest volumes in the crypto markets.
Perfect.
Thanks, guys.
As a reminder, if you'd like to register a question. Please press star followed by one on your telephone keypad.
Our next question comes from David <unk> of Wedbush Securities. David. Please go ahead.
Hi, Thanks for taking the question. So I wanted to ask about Sen leverage commitments increased to one 5 billion, but the balances outstanding.
Our only about $300 million curious as to what could drive these outstanding balances higher is it bullishness of your investors just curious on your commentary as to what could get that higher.
Yeah, Dave I appreciate that question I think there's a couple of things one.
To your point.
Win win win.
When volumes and volatility come back in this ecosystem I think that will drive borrowing.
But also.
<unk>.
As there are additional kind of stability in the price of bitcoin.
And as I commented earlier the volatility in the price of Bitcoin has has.
Really gone down that's not to say we're at the bottom.
Could always be another leg down, but some of the customers that are.
We're working with now, especially in the bitcoin mining area.
There's there's certainly opportunities to two.
For them to draw on their lines as well.
And as you may be familiar the actual bitcoin hash rate is at all time highs notwithstanding the fact that that the prices.
<unk> is relatively flat down quite a bit off a bit tight.
And that just demonstrates the fact that.
They are still that this bitcoin network that has been operating uninterrupted with 100% uptime. Since early 2013. There is no other computer network in the world that that can that can claim that uptime and so over time this lending against bitcoin we.
We believe the opportunity is massive.
And it is a little bit of a bright spot here.
In this quarter that notwithstanding all of the other metrics that we continue to add add customers and.
And continue to grow the.
Sen leverage commitment level.
Okay.
Thanks for that very helpful. And then a follow up can you comment on the competitive environment send volumes down 40% or are clients using an alternative platform to move money or is this purely overall crypto market headwinds just could you comment on the competitive.
Ive environment.
Yes.
We certainly don't have any direct insight into volumes on an.
Of other banks.
But we do track.
Potential transfers of deposits between silver date, and other banks and we're just not seeing it.
I think it's really more indicative of all of the things that Ben mentioned earlier in terms of just lower market volumes and.
Less less trading opportunity and the ecosystem.
Thanks very much.
Our next question comes from Jared Shaw of Wells Fargo. Please go ahead.
Sure Joe Your line is open.
Our next question comes from Tim <unk> of Wells Fargo. Please go ahead.
Familiar your line is open.
Can you hear me.
Yes.
Yes.
Hi, Timur, we can hear you.
Hi.
Yeah.
Yeah.
Apologies for any further questions that star followed by one on your telephone keypad.
We've reconnected with Tim <unk>. Please go ahead.
Hi, This is actually Jared can you hear me.
Yeah.
Hi, Jeremy.
Hi, sorry about the.
The problem there thanks.
Thanks for taking the question I guess just following up on the last we saw Coinbase had an announcement, where they're working with another platform too.
I think many burn does that does that go into <unk>.
Significantly impact the potential for send volumes or is this just an incremental additional competitive pressure, that's that's sort of been out there overall.
Yeah, I think just to be clear the announcements.
Wasn't specific to minting and burning, but but just an announcement that they had enabled.
That competing platform as you mentioned and quite quite frankly.
We've expected this for quite some time.
One of the things again going all the way back to 2013, when we first started looking at banking. This ecosystem one of the challenges that that exchanges and other market participants were having even back then was just there were relatively few banks banking the ecosystem.
Therefore.
<unk>.
These platforms seek to have redundancy, where they can and so we certainly don't don't expect to see any significant impact directly related to that announcement on on.
On the volumes across the <unk> and as I mentioned.
It's something that that we had expected in.
Candidly I was little surprised that it wasn't in place already.
Just given the fact that we know.
That a lot of these exchange platforms like to have had that redundancy in place.
Okay. That's good color and then thanks for the follow up is just going back to the the.
Shifting deposit.
Our focus in bringing on the Cds.
How big is a percentage of deposits I guess would you be willing to have.
Brokerage Cds go or more broadly interest bearing deposits go and then.
Have you added any in the third quarter and sort of what's the churn rate of those.
Deposits.
Yes ill just go ahead and take this one Tony so.
We don't provide any incremental.
<unk> during the quarter.
So for that part of that question and then you know to the broader question of what percentage of the balance sheet or what percentage of our deposits certainly we.
We look at various kind.
Wholesale strategies. If you will is as they're described whether that be federal home loan bank borrowings or or brokerage Cds or other types of borrowings and it really just comes back to the comments that I made earlier around balance sheet management and looking at what assets are those.
<unk> borrowings and wholesale funding what assets are they funding and and and Kent can we generate a positive spread there.
So no specific guidance and where we run a very as you know a very liquid balance sheet.
And we certainly have had the ability to borrow against the securities.
We have done in the past, we could certainly sell some of those securities. If we had further deposit pressure.
But at this point, we're very comfortable with the strategy.
As it's playing out.
Thank you.
We have no further questions on the phone line, so I'll hand back for any closing remarks.
Alright, Thank you Jordan.
So I just want to thank everybody for joining today and.
Notwithstanding the challenging environment.
We remain very.
Very optimistic on on the long term opportunities that the platform provides our strength.
The platform. It's it's the result of the hard work of our entire team at Silver Gate.
I want to thank the team.
We added another 90 plus customers ends and we're actively continue to add customers. So thank you to the silver <unk>. Thank you for all of you who called in and I Hope you have a great day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
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