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spk11: Hello and welcome to today's Silvergate Capital Corporation third quarter 2022 earnings conference call. My name is Jordan and I'll be coordinating your call today. If you'd like to register an audio question, you may do so by pressing star followed by one on your telephone keypad. We'd ask all participants to please limit themselves to one question and an additional follow-up. I'm now going to hand over to Hunter Stembeck to begin. Hunter, please go ahead.
spk04: Thank you, Operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation third quarter 2022 earnings call. With me here today are Alan Lane, our chief executive officer, Tony Martino, our chief financial officer, and Ben Reynolds, our chief strategy officer. As a reminder, a telephonic replay of this call will be available through 1159 p.m. Eastern time on November 1st, 2022. Access to the replay is also available on the investor relations section of our website. Additionally, a slide deck to complement today's discussion is available on the IR section of our website. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors, including the COVID-19 pandemic, that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. Now, I would like to turn the call over to Alan.
spk06: Thank you, Hunter, and good morning, everyone. Silvergate reported strong third quarter results, even as the broader digital asset ecosystem continued to experience challenges. Against this backdrop, Silvergate delivered record net income available to common shareholders of $40.6 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, I 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, Silvergate had fewer than 1,000 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 1,600 customers, average deposits of $12 billion, and send 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 Coinmetrics again this quarter to better understand how activity on the send 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 SEND 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 stablecoins. as volumes from stablecoin issuers such as USDC saw a sizable drop in market cap during the quarter. It's important to note that the correlation between the SEND and the industry won't always be linear, given the different use cases of the SEND. 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 1,677 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 SendLeverage, 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 SendLeverage balances during the quarter between $268 million and $322 million. with an average outstanding balance of $308 million. All of our SEND leveraged loans continue to perform as expected with no losses or forced liquidations. As a reminder, by design these loans are over collateralized and our customers have the ability to draw, pay down, 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 tokenized 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 will continue to provide additional updates on this initiative and the other exciting opportunities being explored by Silvergate 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 Silvergate is one of the best positioned in the industry to both power the current $1 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'm 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 24-7 availability through SEND and EuroSEND, and we have maximized payment windows to give our customers increased opportunities to execute their banking activities when it's convenient for them. 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 EuroSend, 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?
spk13: Thank you, Alan, and good morning, everyone. Starting on slide five with our key financial results. Against the challenging backdrop in the overall digital asset industry, Silvergate reported another quarter of record net income available to common shareholders, reaching $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 $0.88 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 1 leverage ratio at 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 as 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 increase of $10.3 million compared to the second quarter, and $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 2.31% for the third quarter compared to 1.96% in the second quarter and 1.26% 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 2.21% 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 1.66%. 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 on to the loan portfolio. On a year-over-year basis, total loans were down $235.8 million, or 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 of one to four family real estate loans and transferred an additional $33.9 million of one to four family real estate loans to help 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 Silvergate continues to be well positioned for further rate hikes. As of September 30th, 2022, approximately 63% of our interest earning assets were adjustable rate. To give you a sense of our current interest rate sensitivity, assuming a static balance sheet and a positive 25 basis point interest rate shock, net interest income is estimated to increase approximately $16 million over a 12-month period. Turning to slide eight, non-interest income for the third quarter of 2022 was $8.5 million, which decreased $0.8 million compared to the prior quarter and $5.6 million compared to the third quarter of 2021. The decline in non-interest income on a year-over-year basis was primarily due to the gain on sales securities recognized in the prior year. Slide nine shows non-interest 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. Increase in non-interest 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 and initiatives. We continue to expect full year 2022 operating expenses to be in the range of approximately $130 to $140 million, excluding any intangible amortization, though we may come in toward the low end of this range. Overall, I'm 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?
spk11: 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 unmuted when speaking, and please limit yourself to one question and an additional follow-up. Our first question comes from Manan Ghazalia of Morgan Stanley. Manan, please go ahead.
spk08: Hi, good morning. Good morning. We're just on... Just on the SEND platform and the volumes there, I know the volumes are down 40% Q on Q. I hear you that stablecoin was a big driver of that. I guess the question is, is that a function of the greatest stability in Bitcoin prices in the past quarter relative to QQ? 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 send transfer volumes? Or I just wanted to get your views. Is it a function of liquidity becoming more scarce, interest rates going up? Do you think we're at a new normal for send transfer volumes?
spk06: 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 SEND volume. But as we've shared in the past, the power of the SEND is really best demonstrated when there's 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 volumes across the broader ecosystem calmed down a little bit and we've seen the volatility, for instance, in the price of Bitcoin has come way, way down. And so that just provides less trading opportunities for a lot of our customers who use the SEND. But, you know, we should also point out, and this is where I'll ask Ben to comment, you know, just on the fact that it's really difficult to pinpoint exactly where the volumes come from and, you know, to look for correlations with the broader ecosystem because there are so many different drivers. Ben, do you want to add any comments to that?
spk07: Yeah, thanks, Alan, and thanks for the question. Yeah, that's exactly right. I mean, when, you know, 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 or so that make up that data set. And, you know, as you know, we have over 1,600 customers at Silvergate in 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 we saw that sort of that lack of correlation in those two numbers of 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 two years now. And so that is probably the most significant driver. But back to the point, there are multiple uses for the SEND, including stablecoins, which were down pretty dramatically this quarter. So overall, not that surprising given the macro backdrop. Got it.
spk08: And then maybe as a follow up, can you talk a little bit about how you're thinking about the balance sheet, especially as we go into 2023? You know, you brought on some broker CDs and FHLP funding during this quarter. Just wanted to get a sense of, you know, are you managing to a specific balance sheet size or to a cash level? And I guess the question is, why not let some of the shorter dated securities run off to fund some of the deposit clients? Thanks.
spk06: Yeah, it's a great question. Yeah, I'm sorry. Go ahead, Tony. I was just going to kick it to you.
spk13: Thanks, Alan. Sorry to jump in. Thanks for the question, Manon. So the strategy on the balance sheet side hasn't really changed and not expected to change. The composition of the balance sheet between the end of the third quarter and the end of the second quarter is relatively consistent. And as, as you indicated, we did, we did use some short-term wholesale funding to supplement and maintain a relatively stable level on the asset side. But, you know, we, you, you would have seen, you know, there has been some amortization on the securities portfolio, but by and large, we're, we're, you know, we're, we're happy with, with the performance of our investment portfolio. And, and, and, and so, you know, we're, we're, where we've kept stability on that portfolio during the quarter.
spk08: Great, thank you.
spk11: Our next question comes from Steven Alexopoulos of JP Morgan. Steven, please go ahead.
spk03: Hey, good morning, everyone. I wanted to start, in terms of delaying the rollout of a stablecoin this year, Is this tied to a regulatory hurdle? Is it a technology hurdle? Can you give more color there? Is there an updated timeline?
spk06: Yeah. Good morning, Steve. Appreciate the question. So first and foremost, I'll say that it's 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 the regulators and with policymakers and just making sure that we've got this right. We still feel very strongly that we are in the best position of any other bank out there to launch a regulatory-compliant, safe and sound tokenized dollar on the blockchain. And, you know, we're not in a position at this point to provide an update on the timeline. But, you know, and we're certainly disappointed that it looks like we're going to miss our goal of launching it this year. But, you know, that you shouldn't read anything more into that in terms of, you know, I mean, where we continue to build the operational muscle internally, the regulatory compliance muscle, and just working really closely with the regulators to make sure that when we launch something, that we don't hit any speed bumps along the way. Okay.
spk03: That's helpful, Alan. In terms of a follow-up, so if we look at the digital asset deposits at $12 billion average, can you give us a sense how much of that is related to stablecoin volumes at this point? And Do you see balances there stabilizing in this 11 to 14 billion range, or is there still more downside? Thanks.
spk06: Yeah, I'll take the second part of the question and then kick it to Ben for the stablecoin portion. But in terms of do we expect to see stability going forward, I mean, the one thing we've learned having banked this ecosystem for almost nine years now is that, you know, 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, and I've made this comment in the past few months, the drawdown in deposits, given the broader cryptocurrency bear market, combined with the macro backdrop, you know, the drop in deposits is not surprising. And in fact, If you go back and look at the last time we experienced the beginning of a bear market, which was in 2018, we saw very similar activity on the deposit side with a drop from the high to a drop of about 12%, 13% going from kind of the peak in the first quarter of 2018 to the second quarter of 2018, you know, and then things kind of stabilized and, you know, and I'm not predicting, you know, that it's going to remain stable now. I'm just kind of pointing out what we experienced the last time we went into a bear market. But importantly, back then we continued to add customers. We were just starting to drive scent adoption and, And we're doing the exact same thing now. 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 the stablecoins.
spk07: Yeah, thanks, Alan. So I think in the quarter between Q2 and Q3, we saw the total market value of USDC decline from $55 billion to $47 billion, which is about a decrease of 15%. Silvergate average deposits were down about 13% or so. And so that's meaningful just from a directional standpoint. Recall that Silvergate is the transactional bank for the regulated stablecoin issuers that are out there so that when new stablecoins are minted or burned, that activity often happens over the send network because it's 24 hours a day, seven days a week in real time. Nothing has really changed for us in terms of being the transactional bank for those platforms. And we've always encouraged our customers to take their sort of excess deposits, if you will, or 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 change in that realm over the quarter. But we do think that the decrease in overall market cap is just maybe a validation for of sort of the broader macro trend and also reflective of what we're seeing from our customers. But that's how we think about that one. Okay. Thanks for taking my questions.
spk11: Our next question comes from Dave Rochester of Compass Point. Dave, please go ahead.
spk15: Hey, good morning, guys. Just wanted to ask a quick one on the hedging. 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 info in the the queue but just trying to figure out what's new and then what's the trajectory or the plan on that hedging going forward yeah i'm going to let tony um take this one dave i appreciate the question i'll just say up front that you know as as you pointed out with the second quarter queue we you know there there will be additional detail
spk06: in the third quarter queue when, 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?
spk13: Yeah. So Dave, just in response to your question, you know, the, the, the hedging kind of takes two flavors. Part of it is, is hedging for rates down. And then part, part of it is, is, is some hedging related to the, fair value of some of the fixed rate portfolios. So as we provided in the earnings deck, the aggregate hedges total about 40% 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 has remained relatively consistent between the end of the second quarter and the end of the third quarter. And as Alan said, we'll provide more details in the queue. Thanks for the question.
spk15: And any thoughts on the go forward? 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? When you hit neutral or will you remain asset sensitive at the end of it?
spk13: Yeah, I think, you know, the current, you know, we're observing, like everyone else, you know, pretty volatile macro environment. So we're going to, you know, nothing to update at this time, but we're continuing to evaluate and monitor the macro environment and our posture on the balance sheet.
spk11: Okay.
spk04: Thank you, guys.
spk11: Our next question comes from Joseph Vathy of Canaccord. Joseph, the line is yours.
spk01: Hey, guys. Good morning. Just a couple for me. Maybe we could circle back on the stablecoin initiative just a little bit more. I mean, there clearly are other, at least, decently regulated stablecoins that are out in the market today. I know you're 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, you know, kind of more full regulatory compliance? Perhaps those two are the same thing. And then maybe I'll follow up after that.
spk06: Yeah, Joe, thanks. I really appreciate the question. I'm going to ask Ben to jump in here and talk a little bit about where we are on the stable coin, and then I may come in with some further comments. But Ben, do you want to kick us off here?
spk07: Yeah. Yeah, thanks for the question, Joe. So I think that what's become apparent is the current, you know, when you look at the current usage of stable coins today and the current market cap you know, let's call it $150 billion in round numbers. And they're used primarily for digital currency trading use cases, you know, 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 regulators and policymakers is that, you know, using the technology for payments is a massive opportunity at a massive scale. really dwarfs the $150 billion that's available today. And so the nature of these conversations are really around, you know, what does this look like at scale? You know, if there were to be, let's say, a trillion dollars worth of value in stablecoins, what type of, you know, risk-based approach do you need to have in place? How do you invest those funds? How do you make sure that the end user, when they present their token, can ultimately receive a dollar back and make sure that you have the appropriate consumer protections in place. And so, you know, I think that really that's what we're seeing and that's what we're feeling from commentary with folks. There's certainly been a lot of regulatory commentary in the general public over the last 60 days. And I think it's indicative of the fact that people, you know, this is relatively new technology, a relatively new concept, and with just a massive TAM. And so because of that, you know, as Alan mentioned in his comments, we want to make sure that we get it right. And we do think, you know, 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?
spk06: No. Why don't we see what follow-up question Joe has at this point?
spk01: Thanks, Ben. Yeah. Yeah. Thanks. That makes a lot of sense. I mean, it's, you know, 150 billion on stables for, you know, for, you know, trading, you know, crypto trading related activity versus kind of something that kind of honestly looks and feels like M2 money supply. If it was used more broadly, that's a big difference, obviously. And then maybe just one quick follow up here. if we could focus on the customers, the new customers coming on in the quarter, if we could, you know, perhaps get a feel for, you know, are these newer customers, are they bringing kind of, you know, 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 feel about new customer contribution to deposits versus what the macro may mean for lower deposits for existing customers. Thanks, guys.
spk06: Yeah, Joe, that's another great question, and I think Ben's got some good data for you on that one. Yeah, thanks for the question, Joe.
spk07: So, obviously, we look at our customers' deposit balances by category on a regular basis. And I think that 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 add... over 90 customers in the quarter and close to 300 this year in 2022. From the new customers that have come on platform, we've actually seen about a billion dollars in deposits from those customers. And typically that will continue to grow as they finish the onboarding process and get fully integrated within the SEND platform. We are seeing really good engagement, really good interest from customers that are in the pipeline and that have now onboarded. 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 expect.
spk01: Great, guys. Thanks for all that color. Much appreciated.
spk11: Our next question comes from Michael Perito of KBW. Michael, please go ahead.
spk10: 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 build in the broker CDs and borrowings is kind of sustainable versus temporary as you guys see it. I mean, if deposits continue to reduce next quarter, I mean, does the balance sheet start to shrink or do you guys expect to try to maintain that really small spread in the overall asset size in that scenario or are you guys thinking about it a different way?
spk06: Yeah, let me touch on this really quickly and I'll see if Tony has any additional thoughts. As we built our securities portfolio through the rapid growth that we experienced, as you may recall, we attempted to, while we were buying securities, keep 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've started to put some hedges in place, as Tony mentioned in his prepared remarks, we continue to benefit, our earnings continue to benefit from a rising interest rate environment, albeit at a lower rate. pace, the benefit is slowing down. Having said that, there's also a little bit of a lag in the benefit that we experience in the rising rate environment just based on the indexes and when the various securities reprice. So we still have a little bit of a tailwind there in terms of earnings impact while rates are continuing to rise. So, you know, again, we don't provide guidance, Mike, and, you know, we'll kind of take it as it comes, you know, but it certainly so far hasn't seemed to make sense to sell some of the securities that might be, you know, closer to par, you know, due to the adjustable rate nature and give up some of the, you know, the forward earnings potential of those same securities. So, And with that, Tony, I don't know if there's anything further that you'd like to add to that.
spk13: Yeah, no, I think that, you know, not much to add on that, Alan, other than to say, Mike, you know, you've seen our kind of our tier one leverage ratio, which is our kind of, you know, key ratio is close to 11% in the quarter. So it's gone up. So there's plenty of balance sheet capacity there. And, you know, as Alan said, you know, there's typically a 60 to 90 day delay in the repricing of the adjustable rate security. So some of those benefits from interest rate rises, even in September, aren't visible yet on the top line. So we'll continue to benefit from asset sensitivity going forward.
spk10: Got it. Thank you. And then just secondly, Appreciate the color on kind of the new customer deposit balances and engagement. Just as we think about how that translates to kind of the digital asset customer fee income, which was about $8 million this quarter, obviously my understanding is that stablecoin-related activity really doesn't impact that. So is it – I mean, I guess as you guys see kind of this lower lull in activity this quarter but continue to add new customers, is it? Are you guys optimistic that maybe we can start to see that figure reverse the trend of the last few quarters of contraction?
spk06: Yeah, I think, Mike, very broadly, you know, while none of these metrics are necessarily drivers of each other, they are fairly correlated. And what I mean by that is, you know, going back to my earlier comments around fan activity and And the fact that with lower market trading volumes and lower price volatility, that's resulted in obviously lower send volumes. It's also then correlated to lower transactions, the on-ramping and off-ramping of dollars with existing customers who are wiring in money or wiring out money, et cetera. There's just less activity. 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 planning to use the SEND as the market, as the broader crypto market stabilizes, we think the long-term trajectory is still up and to the right. I mean, if you zoom out and just think about some of the announcements, the institutional announcements that have been made in the last two or three months or so with the BlackRock Coinbase partnership, NASDAQ announcing crypto custody, Visa, MasterCard just yesterday, the BNY Mellon custody announcement. There's a lot of institutional adoption that is still coming that and you know, none of these things are live yet. They're all they've all made announcements about things to come. And so, you know, we could not be, you know, more optimistic on the long term trajectory, you know, but these things take time to play out. Great, thanks.
spk11: Our next question comes from George Sutton of Craig Callum. George, please go ahead.
spk05: Thank you. I'm curious if you could walk through more of a same customer sizing of deposits with really the intention to try to understand an average account will 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?
spk06: Yeah, Ben, do you want to take that one?
spk07: Yeah. Yeah, it's a good question, George. And the short answer is unfortunately not. We've said and will 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 you know around the globe and you know as we talked about like in the second quarter you know despite all of the kind of you know uh platforms that didn't perform that well because of of you know different um the leveraging in the system and and whatnot um that was actually a really good trading environment you know for our for our customers and so when they're comparing you know what they can generate from those trading strategies versus you know, what they can earn on excess deposits, even 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. And so, you know, that said, if there aren't those trading opportunities, then, of course, they're going to, you know, take their deposits and earn their, you know, 300 basis points or whatever that they can earn. But it's really difficult, you know, 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.
spk05: Gotcha. So relative to the stablecoin 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?
spk06: Yeah, it's really, you know, obviously it's virtually impossible for us to comment on what others might be waiting for, you know, and from our perspective, You know that the conversations that we're having with our regulators and our policymakers or and and the broader policymakers. You know, are very consistent with some of the public comments that you've seen out there over the last several weeks, you know, no, nobody thinks this is going away. Everybody wants to make sure that, that we've got all that, you know, the industry has all the, all the relevant controls in place, all the things that Ben was talking about earlier. And, you know, this, this, this kind of reminds me of going all the way back to the mid, mid and late seventies with you know, with credit cards and the, you know, EFT commission. You know, I mean, I've, I've, as we've been working on this project over the last couple of years, I've, I've gone back and looked at the history of electronic funds transfer and some of the things that are being brought up by Congress, et cetera, as the different stablecoin bills are contemplated. The data points are very similar. I'm confident that we're going to get through um all of the various um questions and get to a point to where we can get something in the market and as i commented on in my prepared remarks you know you go back and look at what the opportunity is here for for um for global payments and the opportunity is just absolutely massive and you know it's it's also the thing that that that um over time will actually separate silvergate from these you know kind of micro um you know, crypto market volatility, if you will, once we transitioned to issuing a stable coin, you know, a tokenized dollar as we're referring to it on the blockchain. And once that is used for payments around the globe, you know, that'll really change the complexion of, you know, the relatively modest volumes in the crypto markets.
spk03: Perfect. Thanks, guys.
spk11: 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 Chiaverini of Wedbush Securities. David, please go ahead.
spk02: Hi, thanks for taking the question. So I wanted to ask about send leverage. Commitments increased to one and a half billion, but the balance is outstanding. are 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.
spk06: Yeah, Dave, I appreciate that question. I think there's a couple of things. One, to your point, when When volumes in volatility come back in this ecosystem, I think that will drive borrowing. But also, as there's additional kind of stability in the price of Bitcoin, as I commented earlier, the volatility in the price of Bitcoin has really gone down. That's not to say we're at the bottom. There could always be another leg down. But some of the customers that we're working with now, especially in the Bitcoin mining area, there's certainly opportunities for them to draw on their lines as well. as you may be familiar, the actual Bitcoin hash rate is at all-time highs, notwithstanding the fact that the price is relatively flat and down quite a bit off of its highs. And that just demonstrates the fact that there's still this Bitcoin network that has been operating uninterrupted with 100% uptime since Early 2013, there's no other computer network in the world that can claim that uptime. And so over time, this lending against Bitcoin, 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 customers and continue to grow the send leverage commitment level.
spk02: Thanks for that. Very helpful. And then follow up, can you comment on the competitive environment? Send volumes down 40%. Are clients using an alternative platform to move money or is this purely overall crypto market headwinds? Just could you comment on the competitive environment
spk06: Yeah, we certainly don't have any direct insight into volumes of other banks, but we do track potential transfers of deposits between Silvergate and other banks, and we're just not seeing it. I think it's really more indicative of all the things that Ben mentioned earlier in terms of just lower deposits market volumes and less trading opportunity in the ecosystem.
spk02: Thanks very much.
spk11: Our next question comes from Gerard Shaw of Wells Fargo. Gerard, please go ahead.
spk09: Gerard, your line is open. Our next question comes from Timur Brazile of Wells Fargo. Timur, please go ahead. Timur, your line is open. Can you hear me?
spk12: Yes.
spk09: Hi, Timur. We can hear you.
spk11: Apologies for any further questions. That's star followed by one on your telephone keypad.
spk09: We've reconnected with Timur. Please go ahead.
spk14: Hi, this is actually Jared. Can you hear me? Hi, Jared.
spk11: Yes, your line is open.
spk14: Hi. Sorry about the... The problem there. Thanks for taking the question. I guess just following up on the last, you know, we saw Coinbase had an announcement where they're working with another platform to, I think, mint and burn. Is that going to significantly impact the potential for send volumes? Or is this just, you know, an incremental additional competitive pressure that's sort of been out there overall?
spk06: Yeah, I think just to be clear, the announcement wasn't specific to minting and burning, but just an announcement that they had enabled that competing platform, as you mentioned. And 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 and this ecosystem, you know, one of the challenges that exchanges and other market participants were having even back then was just, there were relatively few banks banking the ecosystem and therefore, you know, these platforms seek to have redundancy where they can. And so, you know, we certainly don't expect to see any significant impact directly related to that announcement on the volumes across the SEND. And, you know, as I mentioned, it's something that we've expected. And candidly, I was a 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 that redundancy in place.
spk14: Okay. Thanks for the follow-up. Just going back to the shift in deposit focus and bringing on the CDs, how big is the percentage of deposits, I guess, would you be willing to have brokered CDs go or more broadly interest-bearing deposits go? And then have you added any in third quarter and what's the turning rate of those deposits?
spk06: Yeah, I'll just go ahead and take this one, Tony. So, you know, we don't provide any incremental updates 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, you know, certainly we, you know, we look at various, you know, kind of wholesale strategies, if you will, as they're described here. whether that be federal home loan bank borrowings or brokered CDs or, you know, other types of borrowings. And it really just comes back to the comments that I made earlier around balance sheet management and looking at, you know, what assets are those borrowings and wholesale funding? What assets are they funding? And, you know, can we generate a positive spread there? So, you know, no specific guidance. And, you know, we're – We run a very, as you know, a very liquid balance sheet. And we certainly have the ability to borrow against the securities, as we've done in the past. We could certainly sell some of the 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.
spk11: We have no further questions on the phone line, so I'll hand back for any closing remarks.
spk06: All right. Thank you, Jordan. So I just want to thank everybody for joining today. And, you know, notwithstanding the challenging environment, you know, we remain very, you know, very optimistic on the long-term opportunities that the platform provides, our strengths of the platform. It's the result of the hard work of our entire team at Silvergate. I want to thank the team. We added another 90 plus customers and we're actively continuing to add customers. So thank you to the Silvergate team. Thank you for all of you who called in and I hope you have a great day.
spk12: This concludes today's call. Thank you for joining. You may now disconnect your
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