Silvergate Capital Corp (SI) 2021 Q1 法說會逐字稿

Good day, and welcome to the Silvergate Capital Corporation First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Lauren Scott at Silvergate Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation First 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 11:59 p.m. Eastern Time on May 4, 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.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of these additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. Now I'd like to turn the call over to Alan.

Thank you, Lauren, and good morning, everyone. We started 2021 on a very strong note, driven by growing demand for our digital currency solutions powered by the Silvergate Exchange Network, or SEN. In the first quarter, activity on the SEN continued to grow at a record pace with nearly 167,000 transactions and more than $166 billion in SEN volumes, up 84% on a sequential basis. Transaction revenue from digital currency customers increased 87% from last quarter to $7.1 million.

The number of customers on the SEN platform expanded to more than 1,100, representing record sequential growth as we added 135 new customers during the quarter. Importantly, our pipeline of potential new digital currency customers remains robust as we continue to benefit from the strong network effects created by the SEN. Last year, we introduced our collateralized lending product called SEN Leverage, through which institutional investors receive U.S. dollar financing by entering into a loan agreement with Silvergate. And Silvergate uses the SEN to fund the loans.

We have seen a great deal of market demand. And as of quarter end, we had approved lines of credit totaling $197 million versus $83 million at the end of the year. We are still in the early stages of scaling SEN leverage. And at the end of March, we announced that Coinbase custody and Fidelity digital assets will be 2 new custodians, holding the borrowers bitcoin as collateral in a segregated account. We are very excited about these diverse partnerships and the additional partnerships to come as we create a network of custodians to provide our institutional investor clients with more choice and greater access to capital.

As more institutional participants adopt digital currencies, We have also seen an influx of deposits from investors who require the ability to move U.S. dollars in real time 24 hours a day, 7 days a week. Average deposits from digital currency customers in the first quarter grew by $3.8 billion to $6.4 billion compared to an average of $2.6 billion in the fourth quarter of 2020. These continued significant deposit increases, coupled with our plans for further strategic growth, including the expansion of SEN Leverage, led us to launch an at-the-market or ATM equity offering in early March.

The ATM program allows Silvergate to raise capital efficiently and only when needed, to support our growth and invest in the development of new products to stay on the forefront of the digital currency industry's evolution. I remain incredibly excited about Silvergate's future, which I will discuss further in a few moments after Tony walks you through our financial results. Tony?

Thank you, Alan, and good morning, everyone. As seen on Slide 4, Silvergate reported first quarter net income of $12.7 million or $0.55 per diluted share, up from net income of $9.1 million or $0.47 per diluted share in the fourth quarter of 2020 and up from net income of $4.4 million or $0.23 per diluted share for the first quarter of 2020. Increase in both comparisons was primarily driven by revenue growth with an increase in digital currency-related fee income. We also saw higher noninterest expense due to increased investments for strategic growth and higher FDIC insurance expense caused by both the rate of growth and the absolute level of our balance sheet.

In addition, we had an income tax benefit of $1.2 million for the quarter, which was driven by a $4.1 million or $0.18 per share benefit from stock option exercises in the quarter. Net interest income was up 5% compared to last quarter and up 49% compared to the same period last year. Net interest margin, which I will discuss in more detail in a moment, came in at 1.33%. Our allowance for loan losses remained at $6.9 million, representing 94 basis points relative to loans held for investment.

Turning to Slide 5. Deposits were $7 billion at March 31, 2021, a significant increase from $5.2 billion at December 31, 2020, driven by an increase in deposits from digital currency exchanges, institutional investors and digital assets and other fintech-related customers with elevated client activity evidenced by the record volumes and transactions during the quarter. As a reminder, Our deposits from digital currency customers can fluctuate as our customers in this industry typically carry higher balances over the weekend to take advantage of the 24/7 availability of the SEN. Noninterest-bearing deposits totaled $6.9 billion, representing approximately 98% of total deposits at the end of the quarter. As we continue to focus our deposit gathering strategy on digital currency customers. As a result, our weighted average cost of deposits for the quarter was essentially 0.

Turning to Slide 6. Net interest margin was 1.33% for the first quarter compared to 2.85% in the fourth quarter of 2020 and 2.86% for the first quarter of last year. While we grew loans in the quarter, the decline in NIM was driven by higher cash balances in our asset mix as a result of the significant deposit growth I just mentioned. In addition, securities yields were impacted by lower interest rates on new securities purchased during the quarter, reflecting the current interest rate environment.

Turning to the next slide, Slide 7. Noninterest income for the first quarter of 2021 was $8.1 million, an increase of $3.2 million or 67% from the prior quarter, driven by an increase in fee income from digital currency customers. Noninterest income increased $3.2 million or 64% from the first quarter of 2020, driven by an increase in fee income from digital currency customers and higher mortgage warehouse fees, partly offset by lower gains on sales of securities, extinguishment of debt and sale of loans. In the first quarter, digital currency fee income was $7.1 million, up 87% sequentially and up 317% year-over-year as we continue to see increased transaction volume from our digital currency customers.

Turning to Slide 8. Noninterest expense for the quarter was $19.6 million, up $2 million from the fourth quarter of 2020 and up $5.7 million compared to the first quarter of 2020. The increase in both comparisons was driven by continued investments to drive our strategic growth initiatives as well as higher federal deposit insurance expense related to our significant deposit growth.

Turning to Slide 9. Our securities portfolio totaled $1.7 billion, with a yield of 2.08% for the first quarter, up $780 million from a balance of $939 million at the end of the fourth quarter of 2020 with a corresponding yield of 2.43%. Year-over-year, securities increased $750 million. Our total loans at March 31, 2021, were $1.6 million, up $12.9 million, or 0.8% compared to the fourth quarter and up $511.2 million or nearly 46% compared to the first quarter of 2020. Loan balances continued to benefit from strong growth in SEN leverage as well as historically elevated mortgage warehouse balances. Overall, the credit quality of our loan portfolio remains strong. Nonperforming assets totaled $5.3 million or 7 basis points relative to total assets at March 31, 2021, a decrease from 9 basis points relative to total assets at December 31, 2020.

On Slide 10, you can see a breakdown of the loan-to-value ratios for our commercial and multifamily real estate loans, along with our 1-4 family residential loans. At the end of the first quarter, our weighted average LTV was 53% in our commercial and multifamily portfolio and 54% in our 1-4 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 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 in the current environment. On a case-by-case basis, we provided commercial and 1-4 family borrowers a payment deferral based on demonstrated need. As of March 31, 2021, modifications totaled $65 million or 8.9% of our total loans held for investment.

Before diving into our capital ratios on Slide 12, I wanted to touch on the 2 equity offerings we completed in 2021. In January, we completed an underwritten public offering of 4.5 million shares at a price of $63 per share with net proceeds to the company of $272.4 million after underwriting discounts and offering expenses. As Alan previously mentioned, we then launched a $300 million at-the-market offering program at the beginning of March. On March 11, we sold nearly 1.3 million shares at an average price of $118.39 under the ATM program. The transaction resulted in net proceeds of $151.1 million.

Now turning to our capital ratios. Our Tier 1 leverage ratio was 9.68% at the company level and 9.5% 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 55.1% (sic) [54.91%] increased significantly compared to last quarter due to the increase in deposits. Our loan-to-deposit ratio was 23.22% at the end of the quarter as loan growth was more than offset by a significant increase in deposits during the quarter.

With that, I would like to hand it back to Alan for closing remarks.

Thanks, Tony. Every day, the digital currency industry is growing rapidly, which is an exciting opportunity for Silvergate to continue to provide innovative solutions to our customers. As you can see on Slide 13, the network effects created by the SEN create multiple avenues for growth from payments to lending to funding. Silvergate remains well positioned to provide critical infrastructure for stablecoin offerings. In addition to foreign currency exchange and cash management solutions for our digital currency deposit customers.

As I mentioned earlier, We continue to expand our SEN Leverage product while creating a network of digital asset custody partners, providing our customers with additional choices and enhanced capital flexibility. We are continuously working to expand our product offerings to provide solutions that our customers are asking for. I believe we are in the early stages of a tremendous opportunity in the digital currency industry and I remain incredibly excited about our path forward. I look forward to sharing additional updates on our strategic growth initiatives in the coming quarters. And with that, I would like to ask the operator to open the line for any questions. Operator?

(Operator Instructions)

And our first question today will come from Joseph Vafi with Canaccord.

Great to see some nice results here. Maybe we can kind of just first start on the relationships with Fidelity and Coinbase. I know, Alan, you've mentioned there may be some possibility that there may be others in the marketplace. And I think part of your competitive advantage here is your low cost of capital relative to perhaps other lending solutions in the marketplace. So I was wondering if you could kind of expand a little bit more on why these partners chose to partner with you?

And then kind of the larger opportunity here and how you think you'll be able to maybe fulfill what could be quite large demand from these partners relative to your bank model and being able to stay well within your kind of regulatory guidelines? And then maybe I'll have a quick follow-up after that.

Sure. Thanks for the question, Joe. So yes, we are very excited about the partnerships with Coinbase Custody and Fidelity Digital Assets. I've talked about this a little bit here recently. The fact that what we're really trying to do is create a network of custodians that are partnering with Silvergate and then partnering with our respective customers so that our customers have more choice. And essentially, one of the biggest risks in digital assets is when you're moving the digital asset because as you know, bitcoin is a digital bearer asset.

And so if you've got your Bitcoin in custody somewhere, And you trust that custodian, then you don't really want to move it from one custodian to another. And so our vision for this is that we will create a network of custodians to offer our customers more choice so that if they've already chosen Coinbase Custody as their preferred custodian partner or if they've chosen Fidelity or one of our first partners, Bitstamp or Anchorage, and as you mentioned -- and as I mentioned earlier, we've got others in the pipeline, our customers will not have to move their bitcoin in order to borrow against it.

So it's -- these are, again, foundational building blocks so that we can really ramp this up. And the actual number growth in terms of the outstandings, are right on target. We're actually a little ahead of target, I would say, thanks to the ability to raise capital, which gives us the opportunity to grow a little bit more quickly. But that's the vision. And let me ask Ben if he has anything he wants to add to that before we move on to the next question.

Yes. Thanks, Alan. Yes. So For those that may have missed it, we announced these partnerships with Coinbase and Fidelity during March. And so those came kind of late in the quarter, and we didn't really see additional commitments as related -- as part of those relationships in the first quarter. But we are extremely excited about this next iteration of the product. which will allow our customers to post additional collateral within a 24-hour window, while ensuring that Silvergate has possession of the bitcoin and the ability to liquidate it if need be.

So the benefit of these relationships to Silvergate is it both Coinbase and Fidelity have a diverse group of existing customers that are long bitcoin looking for leverage and may not be existing customers of Silvergate. So it gives us another avenue to grow our customer base. I think part of your question, Joe, was around framing the opportunity. And so one way that we look at that is that the total market value of bitcoin grew by approximately $500 billion during the first quarter alone.

And at the same time, we're not aware of any significant new competitors that are willing to provide U.S. dollar funding that's collateralized by bitcoin. So while the asset values of bitcoin and the demand for leverage increased significantly, the supply of U.S. dollars for funding of the leverage remain constant. So as Alan mentioned, we're really excited about the opportunity going forward. The last thing I'll say on this topic is that as of quarter end, we had less than 10% of our existing 695 institutional investor customers that were utilizing the product. And we believe that almost all of them are still looking for more efficient capital.

And our next question will come from Michael Perito with KBW.

I want to start on the balance sheet. I mean It's -- over 2/3 of the average earning assets in cash, obviously doesn't seem like something that I imagine would be the case longer term. I mean I know you guys are conservative when levering these digital currency deposits as they come in. But at the same time, seeing you guys raise the capital and I think your deposits were only 1% of the dollars moved on an annualized basis on the SEN in the first quarter. So I mean, it doesn't seem like the deposit base is overly elevated or inflated here. So I'm just curious if you can give us any update on how you guys are thinking about the liquidity position of the bank and what we can expect in terms of timing as that is deployed? And I guess I'll start there and ask my follow-up after.

Sure. Let me touch a little bit on the loan portfolio portion of the balance sheet, and then I'll ask Tony to comment on the securities portfolio. But first, you're absolutely right, Mike. I mean we would absolutely hope to grow the loan portfolio over time. And I would say the primary area of growth would be the area we just talked about in answering the previous question around looking at SEN Leverage, where we're really, at a high level, we're looking to take these digital currency deposits and redeploy them back into the cryptocurrency ecosystem. And in order to do that, we want to make sure that we have a diverse group of partners with whom we are spreading the risk, if you will, on the digital asset custody front.

And then the other area, which we've been really pleased to see some growth in over the last few quarters is in our mortgage warehouse area, which as we've talked about in the past, is a very good complement to the potential short duration on the deposit side. It is very difficult to grow mortgage warehouse because it's really more -- we're kind of at the whims of the refi market at this point. But we're growing our commitment lines with existing customers and then adding customers there as well. So those are the 2 areas that I think you can continue to expect growth would be SEN Leverage and mortgage warehouse. And let me ask Tony to comment on the securities portfolio.

Sure. Thanks, Alan. Good morning, Mike. So as you may have alluded, for us, high quality and flexibility are more important factors than short-term yields. And you'll note 98% of our portfolio -- of our investment portfolio was rated AA or AAA. So we've invested significantly over the quarter. We -- our portfolio has increased to about $1.7 billion. It was more weighted towards the end of the portfolio and about 2/3 of that -- of those purchases were at adjustable rates. So as I said and as Alan alluded to, the focus continues to be in diversification. Some leverage gives us a nice yields on the lending side. It's balanced with the securities. But we've also kind of given you an indication of a high low on the deposits. And so we want to maintain a good liquidity profile Having said that, we do have a lot of secondary liquidity borrowing capacity available. So we do have opportunity to increase the investment portfolio.

And that -- and that is a -- it sounds like an ongoing process. I mean, obviously, the period end investment book, like you said, hit north of $1.7 billion. I mean it's fair for us to think that, that process has continued as the last few weeks have transpired. And I guess, the reason I'm harping on it just because, I mean, there's -- I got sort of a fine line right between conservatism and leaving a lot of dollars on the table that can be reinvested for growth, et cetera. So just kind of curious if that process has continued as it looks like it has towards the end of the first quarter based on the end-of-period balance sheet?

Yes.

Yes -- I'm sorry, Tony, let me jump back in here for a second, because you're absolutely right, Mike. We are walking that line between conservatism and not wanting to leave money on the table. Having said that, I've been in this industry, in this banking industry for 40 years. And we want to be prudence and prudent doesn't mean we're cowering here. But if and when rates start to rise, we want to make sure that we haven't stretched for yield in the lowest possible interest rate environment in my career.

And so we are -- as the deposits grow and we are comfortable that they're stable. And we're getting a good feel for the opportunity with SEN Leverage, with mortgage warehouse We are stepping out in the investment portfolio, and you've seen some of the results of that in the first quarter, and that will continue. And again, we're balancing between some adjustable rate securities and then going out for some longer term to get a little bit of yield but always mindful of the overall interest rate risk exposure on the balance sheet.

Very helpful. And point taken as well, Alan. So I appreciate the comments and Tony as well. Just one last one for me. I was curious if you can give a little bit more color. The digital currency-related fee growth was really strong in the quarter. Obviously, you guys added a lot of customers. The pipeline seems as strong as it's been probably in the last few years for more customers. Can you maybe just break out a little bit more what some of the bigger drivers of that increase were? I'm curious if there's any pickup or expected pickup from kind of the stable point payment stuff you guys are doing that could potentially be additive to that as the year progresses here? Any additional color there would be great.

Yes. Thanks for pointing out the growth in fee income because that's something that we've -- our team has really been working hard on, and it's great to see that coming to path here. And it is in the areas that we've historically mentioned. biggest growth area is cash management fees. And as you can imagine, while we don't charge for SEN. And so when you see that explosive growth in SEN transactions, you can anticipate that there's been a lot of movement in addition to SEN wires and ACH activity coming and going. in the first quarter, that has attributed to the growth in fee income. But we've also had strong growth in the foreign currency exchange area. And then I will say that we haven't seen a lot of growth in stablecoin yet. That is something that is -- that we are working around the clock on with some pretty exciting opportunities. Unfortunately, we're not in a position to share anything there at this time. But we do see the stablecoin opportunity as an opportunity to significantly grow our fee income in the future.

And our next question will come from George Sutton with Craig-Hallum.

So with the $660-plus billion run rate for this network size, I'm curious how you think of the growth there. Are you -- do you look at it from a run rate perspective as we look out to Q2 and Q3 and building from there? And then as I look at your Slide 13, and apologies for anybody who doesn't have that up, but you sort of list the different opportunities for growth. I'm curious, and maybe this is a best question for Ben is what does this slide look like in 6 months?

Yes, George. Before I ask Ben to comment on the second part of your question there, I do just want to say so on what might be -- you might be referring to Slide 3 for the first part of your question, which is that explosive growth in SEN transfers in the first quarter, which was $166 billion in the first quarter. We expect that ramp to continue. So we're candidly not looking at it as a run rate per se. But as another stop on the journey with more growth, and part of the reason we have confidence in saying that is because of the customers that we added during the first quarter. We added more customers in the first quarter of 2021 than we've added in any other quarter in -- since we've been doing this business. And even with that, our pipeline is as strong or stronger than it's been in the last year or so. And so there are just a lot more folks coming into this space. And as you're aware from previous conversations that we've had, it takes a while for these customers to get onboarded to those that are going to code to the API, so they can participate in the SEN. And so we just see that growth rate continuing. And now let me turn it over to Ben for the question on Slide 13.

Yes. So as Tony mentioned, part of the increase in expenses during the quarter was caused by increases in R&D costs that we've had associated with new products that we're planning to launch in the coming quarters. We don't have any new products to announce today, but launching new products is something that we see as a critical piece of our growth strategy. We're really focused on adding value for our customers by creating products that solve problems for them and a sustainable competitive advantage for us. Which means you won't see us spending millions of dollars in CapEx to build solutions that already exist in the marketplace. But instead, we'll build upon our existing platform of which SEN is a key piece of that to create new solutions for customers that solve their pain points.

I think it's important to note that last quarter, we announced our custody offering, which we really see as a foundational piece of infrastructure that's required to scale our lending and stablecoin initiatives. So today, just as a reminder, Silvergate provides each of the 4 regulated U.S.-based stablecoin issuers with 24/7 mint and burn capabilities over the SEN. That's a critical piece of infrastructure for the nature of commerce and payments. So we'll look to expand those capabilities in the coming quarters and remain excited about the incredible opportunity in front of us to transform payments and the role that SEN can play in that.

So when you look at this -- at Slide 13 we have some pretty significant areas of potential growth there. So I wouldn't say that there's anything to add to it at this point, but we think that the TAM associated with several of those opportunities is quite significant and enough to keep us busy for the rest of the year.

Great. One other quick question, if I could. You added 135 customers, which is up nicely. I'm curious what investments you're making to continue to increase that potential number? It looks like you've never suffered for -- from the demand side from what we can tell. It's really the ability to bring those customers on board. So I'm just curious how much expansion and capacity you're building there.

Yes, George, we really -- we don't have a bottleneck. Back in 2017, for those on the call that were following us back then, we absolutely, during that last crypto bull market, our pipeline, a lot of our prospective customers were calling at a waiting list. That does not happen in this environment. We have a very strong team. We can onboard customers as quickly as they can get us the information. It is -- this is an institutional offering. So it's a little bit different than a consumer platform. There are different standards for banking institutions.

And so as quickly as they can get us the information. And we have invested in technology. There's fully electronic. Folks can apply on the website. Obviously, we don't have branches. They upload the necessary entity documents. We've got a sandbox for the API that they can actually start playing with before they even show up to open an account. So we've got the people and the technology to expand the customer base as quickly as they show up. So that's not a bottleneck at all. And Ben, have I missed anything in that area?

No. I think that's -- nothing to add on my part.

And our next question will come from David Chiaverini with Wedbush Securities.

A couple of questions for you. I guess, starting with a follow-up on the securities portfolio. You mentioned that 2/3 of the purchases were adjustable rates, which I'm assuming we're at lower yields. Are you able to share what securities yields you're putting them on the books at?

Yes, I'll go ahead and let Tony address that one. Thanks, Tony.

Yes. Thanks for the question, David. Yes. No, in terms of the securities portfolio, the reference is. At year-end, about half of our portfolio was fixed rate, half of it was variable rate. And from -- I won't comment on individual securities, but the majority of the securities are agency mortgage-backed securities. So I think that could give you kind of a good sense of what the yield would be. And as Alan said in the previous comments, I mean, where timing is a factor here in terms of how much you're going to invest in a period of time. So we're looking across the yield curve and planning accordingly. So hopefully, that answers the question sufficiently.

Great. And then moving on to SEN Leverage, a follow-up there. You mentioned about -- Ben mentioned about less than 10% of the 695 institutions are currently taking advantage of that product. How much -- how does the pipeline look for SEN Leverage? And where do you think that 10% could go in terms of indications of interest from your customer base?

Yes. I think Ben mentioned, we've got a pretty strong pipeline. I don't know, Ben, if you want to take that any further.

Yes. So I mean, one of the things -- when you look at the industry as a whole, prime brokerage and just the supply of U.S. dollars for funding of leverage is really constrained and at a time when the asset class is growing significantly. So the institutional investors that we serve truly are institutions and as they trade other asset classes, they're using leverage in multiple different ways. And so it's just so early. And from talking with our customers, almost all of them are looking for greater capital efficiency and looking for leverage of some type. And so it's hard to estimate, David, like what that could go to? Is it 50%? Is it 80%? Is it 95%, it's hard to say. But from the conversations that we're having, we think it's 80% or higher. And so we're going to look to continue to roll it out in a prudent way as we have thus far.

Great. And then my last question is more of a big picture question. Just on the competitive environment, are you hearing of any new entrants, whether large or small, considering getting into the space or on the cusp of getting into the space? And what are you doing to improve your moat if that occurs?

Yes. We occasionally hear of banks that are interested in coming into the space. Having said that, I've also participated in a couple of webinars where people are presenting -- folks in the industry are presenting the banks. And I can tell you, it seems like it's still pretty far away in terms of the most bankers' understanding of this space. And so I think there's still a pretty big gap. So we're not seeing a lot of new entrants. And David, I would say that our competitive advantage is and remains the SEN. The network effect that the SEN provides. And every time we add a customer, we have 135 customers in the first quarter. And not only do each of those new entrants get incredible value from participating in the SEN, but adding them also creates incremental value for every other network participant who is already on the SEN.

And then as we add things like SEN Leverage, we started a couple of years ago, adding foreign currency exchange and then adding SEN Leverage to provide additional products that our customers are using in conjunction with the SEN, it just makes them that much stickier. And so I can't think of a better moat than a network effect. And creating a network of custodians for SEN Leverage will just be a further deepening of that moat because once you're on the SEN and you've got the ability to move U.S. dollars 24/7, and then you also have the ability to borrow and keep your bitcoin at your custodian of choice, I think that's just going to be an incredibly strong and deep moat.

And our next question will come from Mike Del Grosso with Compass Point.

Congrats on a nice quarter. My question is around Slide 13, some of the stablecoin deposits and infrastructure. If I look at the total market cap of stablecoins outstanding quarter-over-quarter, it looks like they grew a bit faster than your digital currency deposit growth this quarter. Is there a portion of that market you're going after? Or can you provide some color perhaps on some of the market segmentation from a deposit standpoint?

Yes, Mike, that's a very good observation, and I really appreciate that question because it allows us to emphasize where we are participating in this stablecoin opportunity. And that is on the transactional side. And going back to my answer to the previous question, the SEN network and the ability for our customers to buy and sell stablecoins and importantly, for the issuers of those stablecoins to mint and burn stablecoins, 24 hours a day, 7 days a week via the Silvergate API. We mentioned earlier that Silvergate is the transactional bank for all of the U.S. regulated stablecoin issuers, which is USDC issued by Circle and Coinbase. And then you also have the PACs dollar, the Gemini dollar and TrueUSD. All of them are SEN participants, all of them mint and burn their dollar tokens with the Silvergate API and the Silvergate Exchange Network.

And what we aren't doing is we are not seeking to hold the billions of dollars in excess deposits that are the reserves for those stable coins. We're not seeking to hold those on our balance sheet and to tie this back to some of the questions that we've had around our net interest margin and against the yield and the large cash balances, if we were also trying to be the reserve bank for those U.S. dollars backing the stablecoins, our balance sheet could be double or triple the size that it is now, but we're in the lowest interest rate environment in my lifetime. And there's not a lot of places that you can go to earn yield on that excess cash other than some of the areas that we're already in and that we're growing, such as SEN Leverage.

And so this is just a long-winded way of saying that we do not want to be the reserve bank for those deposits. We're providing critical infrastructure, and we're happy to let our customers seek other partners, if you will, to hold those balances and earn interest on them because the stablecoin issuers is something that might not be obvious to everybody is the fact that the stablecoin issuers are -- in order to have a viable business, they actually need to earn interest. In many ways, they're like a bank, but without a license, right? And so they need a banking partner. But what they're attempting to do is earn interest on those deposits. And we don't pay interest. We are primarily the transactional bank. And so let me pause there before going on further and see if that answered your question or if you have a follow-up.

No, that's really helpful. I think there was an announcement this morning and so -- from one of the stablecoin issuers. And so it's helpful to know that maybe those aren't exclusive relationships and that you're targeting more of the transactional nature. So that's helpful color.

My follow-up is on a broader question on digital currencies and commerce. I mean this morning, we got an announcement out of PayPal noting that bitcoin purchases will now be enabled on Venmo. So I mean, from my seat, that's a pretty significant milestone in terms of broader adoption. I think we can all understand the relationship between your institutional investor customers and the exchanges and how the SEN provides value there. But can you briefly outline what the role of Silvergate is and help me understand how Silvergate plays into some of the interactions when these payment platforms make some of these announcements? How does Silvergate fit in and potentially enabling commerce?

Yes. I'm going to ask Ben to jump in here on that in just a second. But at a high level, Let me just say that, first of all, I did see that announcement from Venmo. And as you know, that was anticipated as kind of the next step. But all of those institutional players who are providing the ability for their customers to buy bitcoin, they need to source that bitcoin somewhere, and they're likely going to need to source that through somebody who is already a SEN participant. And so while we're not facing off directly against the consumers, it's quite often that we are, in fact, in the chain, enabling institutional players to participate in the ecosystem via the SEN. And I'll ask Ben if he wants to comment and give a couple of examples.

Yes. I think one of the key distinctions is that when you -- I think the majority of people that are buying bitcoin today are looking at it as digital gold or as an asset class as opposed to a payment rail. And some of that has to do with just the intrinsic nature of bitcoin, the bitcoin blockchain, the speed that it takes to update transactions, the cost that -- to use the bitcoin blockchain And also the sort of lack of stability in the value. And so at Silvergate, we're big bitcoin believers and have been for a long time and completely believe in that use case.

Separately, though, from that, you have the emergence of stablecoins or central bank digital currencies, which are really talking about, in most cases, U.S. dollars on a blockchain. And so that's -- and those -- that rail does provide some of the things that bitcoin doesn't in terms of stability, potentially speed to update and then also the cost of -- on chain transactions. And so we think that both use cases will exist and are still early. And we see this massive opportunity of enabling dollars on a blockchain and ultimately doing that through the Silvergate Exchange Network through the 24/7 mint-burn capabilities that are necessary in order to really make that grow.

And so while you look at the growth in stable coins during the quarter, really over the last year, really the stablecoin use case so far is really focused on trading, on DFI and those types of things. And it's really just starting to scratch the surface as it relates to commerce and we think that there's just a massive opportunity broadly as it relates to blockchain-based payments and for Silvergate to play a huge role in that.

Understood. That's helpful. And I guess my last one and then I'll hop back in the queue is a bit of a follow-up on capital allocation. I mean you've added nearly $1.8 billion quarter-over-quarter in digital currency deposits. But we saw the cash on the balance sheet tick up, I think, about $1.4 billion quarter-over-quarter. What are some of the factors that we should look at or that you're considering as it relates to getting more comfortable putting that into the securities or loan book going forward? I understand you mentioned there was some conservatism this quarter, but this -- is that relationship between deposit growth and cash, you anticipate that holding or any color -- additional color there would be helpful.

Yes. I would not expect that the cash balance would stay at the level that you're seeing it. And it's not that we don't have comfort in putting the cash out. It goes back to what I was saying earlier just in terms of trying to be prudent about where we put it. And one of the things that I should also say is that, yes, I mean, we could go out and load up on longer duration security that higher yields and kind of juice the short-term earnings. But we really are and have always been focused on building a sustainable platform focused on the long term. And as we see the demand and our ability to meet the demand for SEN Leverage as we continue to grow the mortgage warehouse pipeline, we will calibrate the excess that we have over and above the loan demand and seek to put it out in higher-yielding securities.

Always with the mindset going back to the -- tying this back to the answer to the first question regarding stablecoins and the 24/7 nature of the SEN and just the fact that our customers who're on the SEN are really counting on us to have a very liquid platform and the ability for them to move dollars 24 hours a day, 7 days a week. And so part of the reason we see growth in deposits is because as the bitcoin ecosystem expands, more and more customers are wanting to keep dollars in their account at Silvergate so they can take advantage of trading opportunities on nights and weekends. And so all of that gets calibrated in how we manage our liquidity, and I'm very confident over time that we will be generating a nice net interest income in addition to the growing fee income base that we're enjoying.

And our next question will come from Eugene Koysman with Barclays.

I wanted to take another stab at the liquidity reinvestment in a bit of a different way than was discussed earlier. And namely, how much of the recent digital currency-related deposit inflows you think are sticky enough that you can begin moving them into securities and loans at this point.

Yes. Eugene, we really look at it at a slightly different way. The way we look at it is not so much how much of the most recent deposits are sticky enough, but rather how much liquidity do we need to maintain for our growing customer base And therefore, then what is the excess over and above that. So it's just a slightly different way of saying the same thing. But suffice it to say that when we experienced the rapid growth in the fourth quarter, we weren't sure how sticky that was going to be the fact that we've added another 135 customers, and they're all in various stages of joining the SEN, the fact that we've had ongoing deposit growth through the first quarter.

And I'm sure it's not lost on you, Eugene. You've probably already done the math. But if our average deposits continued to grow in the first quarter, what does that mean for -- we've mentioned the high and the low, and that's one of the ways that we look to calibrate this is what is the low point, what is the high point and then what is the average? We've started to share that with the broader community so that you can get a little bit better insight into how we're thinking about managing our liquidity going forward.

Got it. And so you talked about your high watermark of $8 billion through February in your ATM disclosures. Can you share with us your trajectory through March, has that maintained?

Yes. I think I'll ask Tony to comment on the specifics, but I think we actually disclosed in the earnings release that are high for the quarter with $8.4 billion, which would indicate that, that continued to grow. But Tony, do you want to just refresh all of those numbers for Eugene's benefit?

Yes. No, that's correct. So the average digital currency deposits were $6.4 billion. the low was $4.6 billion, the high was $8.4 billion, as Alan indicated.

Got it. And now just more of risk management question. I've gotten a lot of interest from investors on that, given that we saw a bitcoin drop about 15% in the day during the weekend. Can you talk to how -- and if there were any margin calls that resulted in collateral liquidation and how your risk management system was able to handle it. And then also what about your capacity to handle positional liquidations in the market as you grow -- as the portfolio grows larger?

Yes, Eugene, that's a great question. And I'll ask Ben to comment on a little bit more of the specifics. But first, just to frame this for you, I think you may recall that we typically start our LTVs on SEN Leverage in the 75% range. And then we would typically have a collateral coverage or margin call, if you will, in the 75% to 80% range. And so just based on that math alone, a 15% drawdown over the weekend, even if our customers were at the maximum of the LTV would not have initiated a margin call And we still have had no losses in this portfolio. We've not had any significant hiccups. But let me ask Ben if he wants to comment any further.

Yes. And one of the considerations from not just a growth perspective but also from a risk management perspective is the use of multiple custodians. And so in addition to Anchorage and Bitstamp, we now have Coinbase and Fidelity. And one of the factors that we look at there is how deep are the order books on the different platforms and what sort of access to market makers that they have. And so -- and another factor there is that we're only making loans on bitcoin because it is the most liquid market. And so we have a number of those different controls in place, and we do a thorough evaluation of each of those partners before we launch these types of programs. But as Alan mentioned, we really -- we haven't had any liquidations to date and feel good about it overall.

Got it. And do you have a customer-specific level look through in terms of different custodians, let's say, if one customer is using multiple custodians to borrow on margin from you. Do you have the single customer borrowings?

Got it. Yes. So we do look at it on a custodian by custodian basis, and we make sure that whatever the loan amount is that we have the appropriate at a particular partner that we have this sufficient collateral at that partner to liquidate it if need be. So we're not really doing any cross-margining across exchanges or different partners. It really is on like on a case-by-case basis where the appropriate amount of collateral is at the appropriate custodian that has the loan that's underwritten.

Understood. And then I have one last one, if I may. On capturing the stablecoin opportunity for minting and burning transactions. What do you view as your ultimate balance sheet size for Silvergate to be able to effectively compete with much larger players that are currently servicing corporate customers through their typical GTS platforms and who will eventually move into stablecoin space to follow these customers for moving money cross-border.

Yes. Not sure that I understand the question. So we talked about the fact that our primary role in the stablecoin ecosystem is in the minting and burning. So I'm not sure I understand the question.

So the question, I guess, is, let's say, if there are corporate customers today that are moving to $10 billion, $15 billion in one shot from one country to another, and they're currently using global transaction services, corporate partners. And if they were to move to stablecoin for these kind of transactions, how big of a transaction are you able to support with your balance sheet? And do you need a sizable balance sheet for minting and burning?

No. We do not need a sizable balance sheet because we're not holding those reserves. And let me make sure that -- I think you understand this, Eugene, so forgive me if what I say is obvious. But a large corporate customer doing a transaction like you're describing, that would happen on the blockchain in these open permission less stablecoin protocols, So they would already own the stablecoin. If they wanted to mint it through one of our partners, we would absolutely have the ability to do that. But the moving of the stablecoin from one party to another, is it's not a U.S. fiat leg. Those deposits can be sitting in reserves somewhere and the transaction actually takes place on the blockchain.

And our next question will come from Joseph Vafi with Canaccord.

Sorry about that, guys. Just a quick follow-up, circling back to Coinbase and Fidelity. Can you explain -- I mean, you are one of those companies as a financial slouch by any means. But clearly, they -- and as you are commenting, Alan, it sounds like there may be more partnerships coming down the pipe. Obviously, the SEN and the network effect is a positive driver for distribution of SEN Leverage and the like. But from a financial standpoint, maybe it'd be interesting to go a little bit more on your cost of capital compared to those companies and then not providing that service directly and instead partnering with you?

Yes. So that's a great question. And we probably haven't done a good job of making this point strongly enough. But back to some of the questions earlier about what are we going to do with all these deposits? The fact of the matter is these larger financial players, they aren't banks, right? So they don't have deposits. They have a lot of customers and they have a lot of customers who own bitcoin and other digital assets for whom they are providing custodial services. But if they want to lend U.S. dollars, if their customers want to borrow, they absolutely need a source of dollars.

And this is -- Ben has talked about this in terms of the fact that there is this massive demand for U.S. dollar borrowing against digital assets. And that demand is only going to continue to grow as more and more players come into the space. And this is just another reason why we're so bullish on the SEN Leverage opportunity because not only do we have a strong pipeline and are we adding partners. But as more institutional players come into the space, there's a natural need for converting some of those digital assets back into U.S. dollars.

And those players, even the sophisticated financial institutions, as you're pointing out, like Coinbase and Fidelity, they need to partner with a financial institution that has funding, that has deposits. And with our technology positioning in the space and the large deposit network that we have, we just think it's a natural fit and seems to be playing out that way.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Alan Lane for any closing remarks.

All right. Thank you, Cole. Before we wrap up, I just want to thank our customers for trusting us with your business. It is truly a pleasure to serve you. I also want to give a shout out to the Silvergate team for a great quarter. And finally, for those still hanging on, thanks to everyone on this call for your continued interest in Silvergate and for your ongoing support. We look forward to speaking with you again soon. Have a great day, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.