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spk05: Good day and welcome to the SilverGate Capital Corporation third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Hunter Stenback with Silvergate Investor Relations. Please go ahead.
spk08: Thank you, Operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation third quarter 2021 earnings call. With me here today are Alan Lane, our Chief Executive Officer, Tony Martino, our Chief Financial Officer, and Ben Reynolds, our Chief Strategy Officer. As a reminder, a telephonic replay of this call will be available through 1159 p.m. Eastern Time on November 2, 2021. 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.
spk07: Thank you, Hunter, and good morning, everyone. Silvergate had another great quarter. I'm pleased to share that our quarterly pre-tax income of $29.4 million was the highest in Silvergate's history, driven by growth in our platform and our balance sheet. Average deposits from digital currency customers continued to grow during the third quarter, reaching a record $11.2 billion, compared to an average of $9.9 billion during the second quarter, which was driven by our customers, who require the ability to move U.S. dollars in real time, 24 hours a day, seven days a week, using our API-enabled proprietary Silvergate Exchange Network, or SEND. To that end, the number of customers on the SEND platform expanded to 1,305 this quarter, an increase of more than 300 customers since the beginning of the year. Our pipeline of potential new digital currency customers remains robust as we continue to benefit from the powerful network effects created by the SEND. Turning to SEND leverage, our Bitcoin collateralized lending product, total approved lines of credit grew 25% to $323 million compared to $259 million at the end of the second quarter. Then leverage continued to perform as designed with zero losses to date and no forced liquidations. And we remain very confident in our ability to scale this product over the long term. Turning briefly to slide four, we have been working with Coinmetrics since early this year to better understand how SEND activity is correlated to the broader industry, a question we are often asked. According to their data, both Bitcoin and Ethereum dollar trading volumes were down significantly in the third quarter and were highly correlated with trends on the SEND. Consistent with this data, SEND transfer volume of $162 billion declined 32% on a sequential basis, but increased by $125 billion or 342% compared to the third quarter of 2020. Similarly, transaction revenue from digital currency customers of $8.1 million was the second highest in our history and increased nearly 150% compared to a year ago, reflecting continued strong demand for cash management and foreign currency exchange services. Finally, before I turn it over to Tony, I wanted to briefly discuss our stable coin infrastructure initiative. Last quarter, I detailed our new partnership with DM. While we are not able to provide an update on timing of the launch today, I remain incredibly enthusiastic about Silvergate's position and ability to contribute to the growing stable coin ecosystem. Over time, we believe stable coins have the potential to become a meaningful payment rail for customers around the world. And as I said last quarter, it's important to keep in mind that we are still in the early innings of this exciting opportunity. We continue to have an open dialogue with our regulators and look forward to keeping you updated on this initiative in the coming months. I will now turn it over to Tony to discuss our financial results in more detail before we take your questions. Tony?
spk04: Thank you, Alan, and good morning, everyone. As seen on slide five, Silvergate once again reported the highest quarterly net income in our history, with third quarter net income of $23.5 million, or $0.88 per diluted share, up from net income of $20.9 million, or $0.80 per diluted share in the second quarter, and up from net income of $7.1 million, or $0.37 per diluted share for the third quarter of 2020. The quarter-over-quarter increase was driven by both net interest income and non-interest income, which benefited from security sale early in the quarter. Even excluding this gain, we still achieved record earnings this quarter, a testament to Silvergate's multiple levers for growth that Alan just mentioned. We also saw slightly higher non-interest expense due to continued investments for our strategic growth, including stablecoin infrastructure, as well as higher FDIC insurance expense, resulting from the rate of growth and the absolute level of our balance sheet. In addition, our income tax rate this quarter increased to 20%. Last quarter, the effective tax rate was lower due to significant tax benefits recognized on the exercise of stock options. Net interest income was up 24% compared to last quarter and up 99% compared to the same period last year. Net interest margin, which I will discuss in more detail in a moment, came in at 1.26%. Our allowance for loan losses remained at $6.9 million, representing 90 basis points relative to loans held for investment. Turning to the next slide, slide six, deposits were $11.7 billion at September 30th, 2021, an increase from $11.4 billion at June 30th, 2021, driven by an increase in deposits from digital currency exchanges, institutional investors in digital assets, and other fintech-related customers. Non-interest-bearing deposits totaled $11.6 billion, representing more than 99% of total deposits at the end of the quarter, as we continue to focus our deposit gathering strategy on digital currency customers. Similar to last quarter, our weighted average cost of deposits for the quarter was essentially zero, Turning to slide seven, net interest margin was 1.26% for the third quarter compared to 1.16% in the second quarter and 3.19% for the third quarter of last year. The increase in NIM from prior quarter was driven by an increase in the proportion of securities compared to lower yielding interest earning deposits in other banks. Yield on securities decreased quarter over quarter due to lower interest rates on new securities purchased throughout the second and third quarters, while yield on loans increased due to higher SEND leverage balances. Turning to the next slide, slide eight, non-interest income for the third quarter of 2021 was $14 million, an increase of $1.9 million, or 16% from the prior quarter, and an increase of $10 million, or 254%, from the third quarter of 2020. The increase in the quarter-over-quarter comparison was driven by a $5.2 million gain on sales securities, partially offset by a decrease in digital currency fee income due to the market conditions that Alan described earlier. The increase in the year-over-year comparison was driven by continued growth in fee income from digital currency customers. Turning to slide nine, non-interest expense for the quarter was $22.3 million, up less than a million dollars from the prior quarter and up $8.2 million compared to the same quarter of last year. Professional services increased year over year, driven by continued investments to drive strategic growth initiatives, including stable coin infrastructure. We also had higher federal deposit insurance expense related to our significant digital currency deposit growth. Turning to slide 10, Our securities portfolio totaled $7.2 billion with a yield of 1.22% for the third quarter, up over a billion dollars from a balance of $6.2 billion at the end of the second quarter with a corresponding yield of 1.35%. Year over year, securities increased $6.3 billion. As I briefly mentioned before, we opportunistically sold some securities early in the quarter, which resulted in a gain on sale. We will continue to take an active and balanced approach going forward and keep our objective of maintaining a high-quality securities portfolio. Our total loans at September 30th, 2021 were $1.6 billion, up $140 million, or 9%, compared to the second quarter, driven by an increase in cent leverage and mortgage warehouse balances, partially offset by decreases in our commercial real estate and single-family residential real estate loan portfolios. Note that the latter two portfolios are paying down as we are not originating new loans in these categories. On a year-over-year basis, total loans were up $227 million, or 17%. Overall, the credit quality of our loan portfolio remains strong. Non-performing assets total $5.8 million, or five basis points relative to total assets at September 30th, 2021, a decrease of one basis point from June 30th, 2021. At the end of the third quarter, our weighted average LTV remained in the low to mid 50% range in our commercial and multifamily portfolio and one to four family residential real estate portfolio. As I've said in the past, the levels at which we maintain our portfolios is key to supporting the amount of our allowance for loan losses. Slide 11 provides a more detailed view of our loan portfolio and an update on COVID-19 modifications. We continue to work closely with our borrowers to provide support as the economy recovers from the impact of the pandemic. On a case-by-case basis, we've provided commercial and one-to-four family borrowers a payment deferral based on demonstrated need. As of September 30, 2021, the majority of COVID-19-related deferred loans have returned to paying, and only an immaterial amount of loans are still being deferred. As a result, this is the last quarter we intend to show this slide. Before turning to our capital ratios, let me briefly discuss the details of the preferred stock offering we completed in August. During the third quarter, we issued and sold 8 million depository shares of fixed rate, non-cumulative, perpetual series A preferred stock. The gross proceeds of the offering were $200 million and net proceeds to the company were approximately $193.7 million after deducting underwriting discounts and offering expenses. We will continue to evaluate opportunities to raise capital efficiently in order to support our strategic initiatives and remain on the forefront of the digital currency industry's evolution. Now, turning to our capital ratios on slide 12. Our Tier 1 leverage ratio was 8.71% at the company level and 8.24% at the bank level, with the bank ratio well in excess of the 5% minimum ratio to be considered well capitalized under federal banking regulations. Our total risk-based capital ratio of 51% reflects the fact that a large proportion of our deposits are held in cash and high grade and highly liquid securities. Our loan to deposit ratio increased slightly to 13.96% at the end of the quarter, driven by the slight uptick in our loan portfolio during the quarter. With that, I would like to ask the operator to open the lineup for any questions. Operator?
spk05: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Michael Parita with KBW. Please go ahead.
spk00: Good morning, guys. Thanks for taking my questions. Or to Mike. So two things I want to hit on. I guess first, just, Alan, I know you kind of said probably what you're willing to say on the stablecoin update, but I'll try anyway. I guess, can you maybe just walk through what some of the holdups might be specifically? Is it kind of know your customer compliance angles that are of concern? Is it capital structure and how the leverage ratio could work around some of the... the deposits that are being held but can't really be deployed anywhere. I mean, what are some of the main pressure points around the stablecoin issue that are hopefully worked out in the near future? And I guess, do you think your banking charter will serve as a benefit to trying to answer those questions? Or do you think it could serve as a detriment in terms of, you know, your capital requirements and things that might make it harder to be competitive longer term in the issuance of the coins themselves?
spk07: Sure, Mike, I appreciate the question. And I guess the way I would frame this, if you look at all of the news that has been coming out recently from the federal regulators around the president's working group on stable coins, that is really the guidance that I think everybody is looking for. We believe that we have, Essentially, we've designed a stable coin in conjunction with DM that, from our perspective, we hope will address whatever guidance comes out from the President's Working Group. But what I would say is that our banking charter will not – we don't view it as a detriment – just the opposite. All of the guidance that we're seeing so far, well, I shouldn't call it guidance, but all the news we're seeing so far would seem to indicate that the regulators are looking to bring the U.S. dollar back stable coins under the regulatory tent, if you will, or under the federal banking guidelines. And we believe that Silvergate is is really well positioned and in fact, best positioned to, to provide the, um, you know, the, all the things that you were touching on, know your customer, uh, BSA, any money laundering, you know, as, as you're well aware, Mike, we've been banking the digital currency industry for eight years. Um, we have a very strong relationship with our regulators. Um, and you know, it would just, it would be imprudent for us to, to, um, to rush the launch right as the president's working group is theoretically going to come out with some guidance because we want to have an opportunity to tweak or adjust anything on the margin that might be necessary prior to launch. But, you know, we're, we're waiting just like everybody else for that guidance to come out and you can rest assured as soon as it, as soon as it's out, we'll adjust accordingly and, and be out to the market.
spk00: Helpful, Alan. Thanks. And then secondly, I wanted to kind of just ask a big picture question about the SEND. And so obviously there was the step back in activity this quarter, $162 billion, which you guys called out was related to trading volume. But I guess to try and put it succinctly here, I mean, how should we think about your competitive positioning today in the marketplace? I mean, on the one hand, it seems like your product roadmap is the most advanced of the banks operating in the space. But on the other hand, you have competitors with larger balance sheets, maybe the ability to offer interest on deposit and things of that nature. I mean, do you find those to be eating into any of your advantage as you try to continue to grow this business? Or do you feel that the entirety of your product offering with the leverage loans and some of the custodial partnerships you have and and what have you, still have a pretty good moat in terms of your SEND network?
spk07: Yeah, we believe that our moat is as strong as ever. And, in fact, I think, you know, if you look at the SEND activity in the third quarter and compare it to the, you know, to the broader SEND market data, the on-chain transaction volumes, which we pointed out on slide four of the presentation, you know, that would certainly suggest that, you know, that Silvergate is right in lockstep with the broader market. And, you know, as you know, Mike, we've been working for, you know, actually for a couple of years now, well, probably three years since we launched the SEND to try to understand and try to find correlation between our send volumes and volumes in the broader market. And as more data analytics, you know, as the data analytics from the blockchain are improved and refined, working with a great team at Coinmetrics, you know, we've been able to ascertain that the Bitcoin and Ethereum highlights volumes are really a good proxy for 10 volumes um i do want to speak just briefly to um to the part of your question regarding you know our our product suite one of the one of the great things about the silver gate exchange network the platform that we've developed is the network effect and the fact that as we onboard customers and as we continue to add products and services you know, those customers just become more and more sticky. And the real story here in the third quarter, I think, is the continued growth of SEND leverage. And, you know, in a market that was, you know, if you look at the Bitcoin price throughout the quarter and you look at the trading volumes as, you know, we've shown from Coinmetrics, you know, the fact that we were able to grow deposits maintain a high average deposit and then start to deploy those or continue to deploy those deposits in SEND leverage, we couldn't be more excited about where SEND leverage is headed for the future. And we think the fee income, again, while it was down from the second quarter, it was higher than the first quarter. And if you look at SEND volumes, first quarter to third quarter, we'll look at fee income first quarter to third quarter. You know, while SIN volumes were down just a little bit, our deposits are certainly up significantly and fee income is up as well. So, you know, we really feel like we're still hitting on all cylinders.
spk05: The next question will come from Ken Zerbe with Morgan Stanley. Please go ahead.
spk11: All right, great. Thanks. So first of all, I love slide four. I think it definitely shows some pretty interesting trends. But I guess the question is, just given the spot trading volume has declined so much in 3Q, right? And obviously that's tied to send leverage, sorry, it's tied to send transaction volumes. Presumably it's also tied to fee income being down as much as it is this quarter X, the gains, of course. It just feels... like you're clearly very tied, rightly or wrongly, to the spot trading volume of Bitcoin and Ethereum. Is there anything that you guys can do to just help separate that out or sort of break that correlation a little bit more? Because I guess the alternative is if you can't, then suddenly we're all just looking at spot trading volumes to know whether or not you're gonna have a good quarter. Thank you.
spk07: Yeah, Ken. Thank you very much. I'm going to turn this over to Ben in just a minute, give him a chance to weigh in here. But, you know, the one thing that I'll – if we zoom out a little bit and look at this at a high level, you know, we have, as I mentioned previously, you know, we've been banking this industry for eight years. And so we've certainly been through, you know, kind of peaks and valleys in in our growth. Having said that, generally growth has been up and to the right. And as we pointed out, you know, we've now crossed over 1,300 customers, added 300 customers this year. So we are in a growing industry with a growing customer base and a growing suite of products. And so, yeah, While we certainly have a high correlation to spot trading volumes, as we've indicated here in the presentation and as you just pointed out, we believe that all of that is generally going to be growing up and to the right in the coming months, quarters, years. And as we continue to add additional products and services, we will continue to grab more and more income But let me turn it over to Ben to see if he wants to add any additional color there.
spk06: Yeah, thanks for the question, Ken. Yeah, I mean, just I think building on what Alan had just said, you know, another use case for the SEND is stablecoins. And, you know, today we bank each of the four regulated stablecoins that are in the market. And we know that our customers use the SEND regularly. in order to mint and burn stablecoins 24 hours a day, seven days a week. And so, as we've talked about in the past, that use case today for stablecoins is really around trading. But as we're seeing more and more, that use case is moving towards commerce and remittance. And so, Just as Alan said, the goal here is to add products that continue to leverage our capabilities of the SEND, serve our customers, solve problems for them, and continue to grow our share, as Alan explained.
spk11: All right. No, I understood. Thank you. And then maybe just my second question. Can you just address deposit growth? Obviously, you've come off of two or three very, very good quarters, and this quarter deposit growth was a lot more stable than it has been recently. I know one of your competitors just posted, I think it was like 12% digital deposit growth for 3Q, and you guys posted something for less. Can you just help us understand why they might be growing? I mean, you don't have to address them, but I'm just trying to understand what the dynamics are in your portfolio of maybe why deposit growth is muted as it was. Thank you.
spk07: Sure. So when you look at the benefits that the SEND provides, we need to step back and look at what are we really trying to accomplish? What problem do we solve for our customers? And the problem or the service, to make it a positive statement, is a 24-7 service. on-ramp and off-ramp to the digital currency ecosystem. And so in order to provide that, and what does that do? It reduces banking friction, reduces counterparty risk, increases capital efficiency. And so we really strive to work with our customers to make sure that they have access to liquidity and on our platform 24 hours a day, seven days a week. And so we actively work with our, with our large exchange customers, um, our large OTC desks to make sure that they have enough deposits on the platform, but not more than enough, um, you know, to, to handle the, the 24 seven nature of this ecosystem. And we, we actively encourage our customers, um, if, if volumes are down. Okay. So, um, and obviously volumes were down in the third quarter, and they have capital sitting there idle, and they're looking for something else, they're looking for earnings on that capital, then we encourage them to take the excess and put it somewhere else. Now, having said that, we are just now ramping back up our own off-balance sheet levers so that we can sweep deposits off balance sheet, you know, so that our customers can earn a yield on their excess deposits. That was something that we had done back in 2017 and 18. And then that need had kind of gone away. But now as more capital has come into the system and we're gonna start to see these peaks and valleys, you know, what we wanna do is make sure that our customers have enough capital on the send to transact 24 seven and if they have excess that they want to earn yield on, we don't pay interest on these deposits, but we're happy to help them find an alternative solution so that they can earn interest on the excess.
spk05: Our next question will come from Joseph Bassey with Canaccord. Please go ahead.
spk09: Hey, guys. Good morning. Nice results. Just wanted to look at quarter, maybe through a slightly different lens. So we saw some decoupling, obviously, this quarter, transaction volumes down sequentially, but deposit growth up sequentially, net income up sequentially. So is that, you know, when you look at, you know, at the business, is that, you know, theoretically sustainable and kind of a more down trading quarter, given the levers in the business? And then kind of what did you learn in the quarter given that decoupling?
spk07: Yeah, good morning, Joe. Thank you for those observations. And I think what we kind of relearned is something that we've experienced in the past, which is when volumes decline, we don't generally see a corresponding decline in our deposits. This was certainly true, you know, now I'm going to compare to the crypto winter. We're certainly not in another quote-unquote crypto winter. In fact, you know, I think the summer was kind of the pause that refreshes as we were heading here into the continuation of this bull market. But what we saw in 2017 and 18 was was a massive run-up in deposits during that last bull run. And then as things calmed down, we did not see a corresponding decline in deposits. And that is, again, it goes back to what I was saying previously. Our customers want to maintain liquidity on our platform to take advantage of trading opportunities. And they don't look at this as a flash in the pan. They look at this just the way we do, that this digital asset, this digital currency market is here to stay. It's not going away. And so they're going to maintain deposits on our platform in order to take advantage of the opportunities that they see. And then on top of that, as we continue to add customers, as we've discussed in the past, there's a natural kind of lag between when we add a customer and you know, and then when they get their funding and start using the SEND, et cetera. So we kind of see a little bit of a, you know, anywhere from a, you know, one to two quarter kind of ramp up between when we add a customer and when we ultimately see their full deposit capability hitting the SEND. And so, again, This just gives us, you know, talk about relearning. It just proves out the fact that while trading volumes declined, you saw the deposits hold steady and actually grow a little bit. And it allows us, it gives us confidence to continue to invest those excess deposits, which again takes us right back to the great opportunity that we see with SEND Leverage. And to be able to put out that incremental deposit growth into higher yielding assets and the fact that we've built this infrastructure of digital asset custodians so that our customers can have confidence that they can borrow against their Bitcoin while holding the Bitcoin collateral with one of our custodial partners just gives us a lot of optimism for the future of that product.
spk09: That's great. And, you know, in the last few months, some other digital asset players that have been providing yield on, you know, quote, unquote, you know, they're not really savings accounts because they're not banks. They've gotten some regulatory scrutiny on those yield-bearing accounts that they're providing to customers. But given your bank charter, I think, you know, you would see less regulatory scrutiny there. on that kind of product, if you know what I'm talking about. And I'm just wondering if you see that as a business opportunity at this point, or it doesn't kind of fit in the roadmap at this point. Thanks, Alan.
spk07: Yeah, Joe, that's, again, a really good observation. And we've certainly, you know, many of those folks that are seeing some regulatory pushback are customers of ours. and have great products. But one of the primary differences, as you're pointing out, between their business models and our business model is that we are a state-chartered, federally regulated financial institution. And so... We could certainly, if we wanted to, we could start taking folks, taking their deposits in and paying them interest. But we have our own source of funding, which is the deposits from this ecosystem. A lot of those other platforms, they're not banks, so they don't have a low-cost deposit source. And so where we're really focused is on, you know, you've probably heard this term, but this pristine collateral with Bitcoin as a digital bearer asset. And I've said on these calls and in other venues, you know, in the past that we believe that this SEND leverage, Bitcoin collateralized lending, could be some of the best lending we've ever done because the collateral is a bearer asset that we have possession of when we lend against it. And it's in a market that trades 24 hours a day, seven days a week. So we feel really good about the collateral. We feel really good about our ability to sell the collateral if need be. Having said that, as I pointed out in my opening remarks this morning, the send leverage platform is absolutely working as designed with, with no losses, no forced liquidations. Um, and, and so again, you know, and, and the, the risk adjusted returns on this are, you know, we're in a zero interest rate world. Um, you know, we just, you know, again, we, we view this as a great opportunity and we don't feel like we need to deviate and start doing what some of the other, um, platforms are doing out there. Um, you know, providing yield on, on, on stable coins, et cetera. You know, we we think our platform and the way we're designing it with the ability to take low cost deposits and put them out in, you know, in send leverage and other short duration assets, you know, to to to achieve a, you know, a fair, you know, balanced risk adjusted return is is is the best way for us to to provide a return for our shareholders.
spk05: Our next question will come from George Sutton with Craig Hallam. Please go ahead. Good morning.
spk06: This is Adam Onford, George. Thanks for taking my questions. I was hoping you could dive a little bit deeper on SEM leverage. Specifically, is there anything in your outlook in terms of, you know, how you see it expanding over the next year or if there's any milestones or goals you could speak to?
spk07: Yeah, I'm sensitive to the fact that I've been doing all the talking here, and I've got Tony and Ben here with me. So I'm going to, again, turn it over to Ben in just a second. But just at a high level, what I would say is that when we first launched the program, when we came out of the pilot, we mentioned and we've reinforced the fact that we're thinking about in the short term kind of concentration levels not to exceed our capital base. And, you know, the good news is here is we've been raising capital along the way here as we've been growing. So that gives us an opportunity to continue to grow that book. And as you saw in the quarter, we had some nice growth. But let me turn it over to Ben for a little bit more color commentary. Okay.
spk06: Yeah. So, I mean, you know, we've already mentioned it, but, you know, I think it's notable that, you know, commitments grew by 64 million in the quarter and outstanding grew by 51 million, you know, at a time when trading volumes were down, you know, industry wide by about 43%. And the average price of Bitcoin during the quarter was down about $5,000. So given those headwinds, we feel good about the growth in the quarter. And, you know, maybe importantly, we still have less than 10% of our customers that are using the product. So you can see the incredible growth that we have there. The other thing that's worth noting is that we haven't had to compromise on the yields that we're charging or the loan-to-value ratios that we're offering to customers. Maybe the last comment here is that, you know, we did – Marathon Digital, which is a customer of ours, made an announcement on October 1st that we had agreed to provide them with a $100 million line of credit. Obviously, that's not included in the third quarter number. And we've talked about Bitcoin miners as a potential user of some leverage in the past. In this particular case, Marathon wants to hold Bitcoin on their balance sheet. So it really looks more like the corporate treasury use case than it does financing, you know, mining equipment. And so for us, this loan, uh, is just like the others, uh, that where they're Bitcoin is collateral. We take possession of the Bitcoin and we hold it through, through one of our custodial partners. So, you know, as, as Alan mentioned, um, you know, we think that there's just a tremendous growth ahead. You know, that said, we're going to roll it out and continue to roll it out in a prudent way as we do with all products. That's helpful. Thank you. And then final question for me. I know that you're limited in what you can talk about with respect to DM, but Facebook announced this morning that it selected Coinbase as a custom partner for Novi, and they'll be using the PAX dollar for that. Obviously, there's some benefit there. with working with Pax on the mint and burn enablement, but I'd be curious to know if there's any other work you're doing that's adjacent to the DM pilots, or is this potentially an extension of that work as well in your, in your view?
spk07: Yeah, it's a, it's a fair question. And, you know, we're, we're certainly, you know, we're certainly working closely with, you know, with DM and with Paxos, you know, Paxos, I think you know was one of our very first customers in this initiative going all the way back to 2014 or 15. And so as they worked with Novi to bring this pilot out, we've certainly been involved in supporting them in that effort. But as to the broader launch, we only know, we're not inside at Facebook or inside at Novi, so we only know what they say publicly. But what I think David Marcus reiterated this morning was that this is a pilot for them to test all of their connectivity, et cetera, but they still intend to to pivot to DM as soon as that comes out. And unfortunately, as we said at the outset, we really can't say any more at this point about the DM opportunity.
spk05: Our next question will come from Will Nance with Goldman Sachs. Please go ahead.
spk02: Hey, guys. Good morning. Thanks for squeezing me in here.
spk07: Morning, Will.
spk02: Maybe I can kick off on some of the balance sheet dynamics and the deposit reinvestment that you did throughout the quarter. I just want to get a sense for kind of destination mix of the balance sheet, you know, just hypothetically if deposits are kind of flat from here. Is this roughly the mix of kind of securities and cash that you guys are looking to achieve for, you know, a given level of deposits? Is there more room to do on the deposit reinvestment that could – that could lead to, you know, further uplift and kind of earning asset yields over the next couple of quarters.
spk07: Sure. Well, um, I think I'll, I'll go ahead and give Tony a chance to, um, to address the, the question. I just, the only thing that I want to say before that is, you know, I'm, I'm, you know, well, we, we don't provide guidance, um, as you know, but, um, You know, I wouldn't want anybody to misconstrue anything that I've said so far to suggest that deposits are going to be flat from here. You know, I mean, you know, certainly, yeah, yeah. You know, and so I guess, you know, the question is, you know, if you zoom out again and look at the ramp over the, you know, over the last three quarters, obviously, you know, we played catch up a little bit in terms of deploying the deposits as we, you know, as we confirmed that they were sticky. I think the solid average deposit growth, the fact that, and if you look at the high and low, and maybe Tony can address this a little bit, but the fact that we saw a little bit less volatility between the high and the low also gave us confidence to, and gives us confidence to continue to deploy the deposits. But let me not steal any more Tony's thunder. Tony?
spk04: yeah no thanks alan and thanks for the question will um so i would say you know a couple things first our our philosophy and our approach to the securities portfolio hasn't really changed so we'll you know we'll continue to prioritize asset quality and preservation liquidity and you know we you know when when you look at the securities portfolio um you know we've said in prior quarter you know we kind of target a 50 50 mix between fixed rate and adjustable rate and so The adjustable rate portion of the portfolio gives us a lot of flexibility, particularly when you combine it with cash. There's clearly room there. To touch on Alan's comment on the deposits, when you look at the high and low in the second quarter, the high and low relative to the average was you know, in round numbers, closer to 25% on either side of the average, whereas in this quarter, it was closer, it was a tighter band, you know, let's say plus or minus 10%. So that also, you know, clearly gives us, you know, confidence that, you know, that, you know, we continue to see flexibility and opportunity to invest in terms of in terms of the asset side of the balance sheet.
spk02: Thanks for that. And yeah, I totally appreciate it. I was more just asking about proportions on the balance sheet, just using flat as a kind of straw man argument for how you guys would look to invest in a given level of deposits. So appreciate that. And then my follow-up question would just be on SEM leverage and some of the stuff that's been coming out of the Basel Committee around capital risk weightings on crypto exposures on the balance sheet. What do you guys think about the likelihood of capital requirements for things like SEM leverage and other kind of crypto exposures increasing? And maybe you could touch on sort of off-balance sheet vehicles that you could use for SEM leverage. Has there been any progress on what those might look like?
spk07: Sure, those are great follow-up questions, Will. And so on the Basel front, for those not familiar with that, there was a proposal that was floated a couple quarters ago that would suggest that assets that banks hold on their balance sheet, crypto assets, would be subject to a much higher risk-weighted capital treatment. And when you do the math on that, it would essentially require banks to hold dollar for dollar, dollar of capital for every dollar of exposure that they have to crypto assets. First thing is that's a proposal. It's a Basel proposal that would need to first be finalized, and then it would have to be adopted by the U.S. regulatory agencies and find its way into our regs. So with all that being said, even if that was to happen, as we've pointed out, if it's dollar for dollar, that we've already set our own risk framework. And for the time being, for the near future, we don't intend to take our on-balance sheet exposure to a level that would be higher than our capital base. So we would theoretically be in compliance anyway because most of the rest of our balance sheet is, you know, is on such a low risk-weighted basis. As to then, you know, how do we continue to grow, you know, if we are theoretically limited to one times capital? Well, that is the off-balance sheet that you're referring to. And while we don't have anything to announce today, we are actively – working with folks to come up with structures for what that might look like. And this gives us the opportunity, as we've said in the past, to think about this as more of a loan origination platform and an asset management opportunity where we could continue to originate and service these loans, but yet lay off some of the balance sheet risk to other you know, to other partners. And in a yield starved world, you know, especially as Bitcoin becomes more mainstream, as you have things like the ETF that was just launched today, you know, we feel really confident that there are going to be folks that are looking for yield that are going to be good partners for us in that regard. And that's, you know, just another reason why we're so bullish on this end leverage opportunity.
spk05: Our next question will come from Dave Rochester with CompassPoint. Please go ahead.
spk10: Hey, good morning, guys.
spk05: Good morning, Dave.
spk10: On the client growth front, you guys continue to report a pretty robust pipeline of new accounts in the onboarding process. I was just wondering if there are any lumpy ads coming that you can think of off the top of your head that might move the needle, sort of stand out in your mind, or would you say you generally already bank the largest players in the space and And the additions coming in today are generally smaller players.
spk07: Yeah, that's a great question. And obviously, you know, Dave, we don't provide guidance. And, you know, but even if we did, it's really hard to predict because there are so many new potential entrants coming into the space. It's one of the beautiful things about, you know, being in this ecosystem is that as As additional institutional interest, you know, as that interest turns into action, you know, we regularly see new folks hit our pipeline that weren't even on our radar before. But I'm going to turn it over to Ben, see if he has any additional commentary that, you know, that he wants to provide along those lines.
spk06: Yeah, so I guess just to anchor, you know, we have added about 300 new customers this year, and the pipeline remains robust at about 200 prospective clients. And when we say prospective clients, those aren't just, you know, leads. There's quite a few customers or prospects that we turn down pretty quickly still that are kind of coming through the front door. So, you know, we feel good about that 200 customer number and our ability to continue to go from there. And then, you know, as Alan mentioned, it's really, you know, kind of hard for us to predict, you know, who the next, you know, large entrant into crypto might end up being. But because of the SEND network, those folks usually end up coming to us. And, you know, we explain to them the SEND network and ultimately what the benefit of that is, if they haven't heard from the other participants already. And then beyond that, I think as we, you know, as we continue to focus on, you know, the growth in stable coins and their usage for commerce and remittance, it really opens up, you know, a whole new category of customers, if you will, that are really focused on payments and platforms. So overall, we feel good about the growth prospects there.
spk10: Great. I appreciate that. I was just curious, you know, over... Over time, have you seen the onboarding process maybe go more smoothly or have you been able to shorten the timeframe that you're able to bring on new customers or just vary across the customers depending on where they're coming from? Just curious if that process has accelerated over time.
spk07: Yeah, we have a pretty efficient customer onboarding process. We certainly... Earlier in this initiative, you know, we had some times when, you know, we commented on this, you know, probably early when we were public, the fact that, you know, some of our customers used to refer to our, you know, we called it a pipeline. They called it a waiting list. This was back in the 2017-18 run-up. But, you know, with some of the technology tools we've implemented with Salesforce, you know, with our customers' ability to, to do the full process online. It really just depends on whether they're ready. What we need from a new customer in order to onboard them is pretty straightforward and is pretty standard. And so the only difference, the differences that come into the onboarding process would depend on the level of technological integration that our customers are looking to do, which even that is pretty seamless. Folks can get on our website and get into the API sandbox and test things up. So it really just depends on their engineering resources and the priorities that they have on their end. But we have not suffered at all, nor have our customers suffered from the ability to you know, to get onboarded and get going just as quickly as their priorities allow.
spk05: Our next question will come from David Schiaverini with Wedbush Securities. Please go ahead.
spk01: Hi, thanks. A couple questions. The first one is a follow-up question on the Novi announcement of using the PAX dollar. I was wondering to what extent Does this jeopardize the economics to Silvergate from Diem? Is the Diem market opportunity essentially cut in half if both Diem and Paxos, the Pax dollar, is available in the Novi wallet? Or is the corporate sponsorship of Diem strong enough to ensure it's the dominant coin in the Novi wallet?
spk07: Yeah, David, that's a great question. Obviously, we don't know the answer to that question. What I would say is, first of all, Paxos is a great company with a great product, and we're very happy to support the Pax dollar and all of the activities that we support for Paxos. Ultimately, the market will decide. One of the things we've talked about in the past is, you know, why did we choose to work with, with DM, for instance, as opposed to launching our own stable coin. And it really comes down to distribution, you know, and, and so the answer to your question will be, will be market driven and it will depend on, you know, which, which platform, which distribution wins. And, you know, I, I think over the long term, I'm not sure there's going to be room for a half a dozen U.S. dollar-backed stablecoins. I think there will be some consolidation. There are certainly some folks that have a head start, but the use case so far has been around cryptocurrency trading, and the real opportunity is around you know, remittance, consumer, you know, consumer to merchant payments, et cetera. And so I think we're still really early and it's really hard to, you know, to answer the question the way you framed it.
spk01: Yep. Fair enough. Thanks for those comments. And then my follow-up question is related to, you commented earlier about Marathon Digital Holdings and the $100 million facility. which is quite sizable relative to the existing loans outstanding for SendLeverage. Can you talk about the opportunity and potential loan demand from other Bitcoin miners? How big is this opportunity?
spk07: Yeah, that's a great question. And we think the opportunity is huge, which kind of gets us back to, you know, one of the other questions that came up here a few minutes ago around potential off-balance sheet vehicles for us to continue to originate and service these loans. Let me say at the outset that that use case, and I think Ben really described it well as kind of the corporate treasury use case as opposed to the trading use case, which just, again, shows kind of the evolution of this ecosystem, right? When we first launched the pilot for SendLeverage, you know, almost two years ago now, you know, the primary use case was around traders, you know, those who were looking to pledge their Bitcoin as collateral to buy more Bitcoin, you know, in a trading scenario. But we're seeing the maturation of the space and corporate treasuries, you know, the miners are, the most obvious example, um, you know, companies that are mining Bitcoin want to hold the Bitcoin, um, but want to continue to reinvest in plant and equipment. And, um, and so we'll take their Bitcoin as collateral, um, for a loan. Um, but it is a line of credit. Um, and so, um, you know, what, what we don't know is how much of that, those, these lines of credit will actually be utilized. Um, but we want to be ready to handle the demand, um, Because the Bitcoin mining use case is only one of potential many corporate treasury use cases as more and more corporate treasuries put Bitcoin on their balance sheet. So this is one of the reasons we're so excited that we saw this opportunity early and that we've been working on it. literally for over two years, since the second quarter of 2019 when we first started to develop the SEND leverage product.
spk05: Our next question is a follow-up from Ken Zerbe with Morgan Stanley. Please go ahead.
spk11: Hi, Craig. Thanks. Just one quick follow-up. I know you don't provide guidance, totally fine, but there's definitely been a lot of, sort of interest in activity around, you know, Bitcoin going from, I don't know, call it 40 something thousand dollars up to $60,000 all really around the first couple of weeks of October. Um, are you able to comment about factually, you know, the trading volumes that you've seen over the, over the last couple of weeks? Thanks.
spk07: Yeah, Ken, it's a, it's a fair question. Um, And unfortunately, you know, we don't provide any kind of a, you know, mid-quarter update unless, you know, unless it's required disclosure, as we've done in the past, you know, when we've gone out, you know, to the capital markets, et cetera. So, but what I can point you to, at least as a partial answer to your question, is just, you know, if... Slide four of the earnings presentation, which is the correlation between spot trading volumes and SEND activity. If, in fact, that correlation holds true, then I think folks can just look at that kind of mid-quarter and say, well, gosh, things are down. Oh, so Silvergate's probably flat. Oh, things are up. Maybe you know, maybe Silvergate's up. But, you know, it's not guidance because it's a correlation that's not 100%, right? You know, I mean, Ben did some work on this, and I know we're short on time, so I won't turn it back over to him here. But, you know, there is a high correlation, but it's not 100%. So, unfortunately, that's the best we can do at this point.
spk11: All right. Thank you.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Alan Lane for any closing remarks.
spk07: Great. Thanks, Matt. And thank you, everybody, for your participation. I'm incredibly proud of our great results, which are a testament to the continued hard work of the entire Silvergate team. And as you can see, we've built a diverse earning stream with multiple growth levers. And looking ahead, we continue to see tremendous opportunity to provide innovative solutions for our digital currency customers. I look forward to sharing additional updates on our strategic growth initiatives in the coming quarters. We appreciate all of your support. And I've said this before, but it's a great time to be a Bitcoin banker. Thank you, everybody. Have a great day.
spk05: The conference is now concluded. Thank you for attending today's presentation.
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