Earnings Transcript for SICP - Q2 Fiscal Year 2021

Operator: Good day. And welcome to the Silvergate Capital Corporation Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Hunter Stenback with Silvergate Investor Relations. Please go ahead.

Hunter Stenback: Thank you, Operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation second 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.

Alan Lane: Thank you, Hunter, and good morning, everyone. I am pleased to share that Silvergate had an outstanding second quarter. We nearly doubled pretax income compared to the first quarter of 2021. We announced our continued development of stablecoin infrastructure, including an agreement to be the exclusive issuer of Diem USD stablecoins. We continue to grow SEN Leverage, our U.S. dollar base Bitcoin collateralized lending product and we completed the at-the-market equity offering that we launched in early March. Our success continues to be driven by strong demand for our digital currency solutions powered by the Silvergate Exchange Network or SEN. In the second quarter, the number of customers on the SEN platform expanded to 1,224 and our pipeline of potential new digital currency customers remains robust, as we continue to benefit from the powerful network effects created by the SEN. We generated more than $239 billion of volume on the SEN, a new record and an increase of 44% compared to the first quarter. We also continue to see elevated demand for cash management and foreign currency exchange services bolstered by our proprietary API, which allows our customers to seamlessly interact with us. As a result, transaction revenue from digital currency customers grew nearly 60% from last quarter to $11.3 million. Turning to SEN Leverage, total approved lines of credit grew 32% to $259 million, compared to $197 million at the end of the first quarter. Importantly, SEN Leverage continued to perform as designed. Despite the decline in the price of Bitcoin during the quarter, we have experienced zero losses to-date and no forced liquidations.

Tony Martino: Thank you, Alan, and good morning, everyone. As seen on slide four, Silvergate reported the highest quarterly net income in our history, with second quarter net income of $20.9 million or $0.80 per diluted share, up from a net income of $12.7 million or $0.55 per diluted share in the first quarter and up from net income of $5.5 million or $0.29 per diluted share for the second quarter of 2020. The increase in both comparisons was primarily driven by revenue growth, with an increase in digital currency related fee income, as well as interest income from higher securities and SEN Leverage balances. We also saw higher non-interest expense due to continued investments for strategic growth, including stablecoin infrastructure, as well as higher FDIC insurance expense resulting from the rate of growth and the absolute level of our balance sheet. In addition, our income tax rate is effectively zero, driven by a $5.5 million or $0.21 per share benefit related to stock-based awards in the quarter. Net interest income was up 32% compared to last quarter and up 89% compared to the same period last year. Net interest margin, which I will discuss in more detail in a moment, came in at 1.16%. Our allowance for loan losses remained at $6.9 million, representing 93 basis points relative to the loans held for investment. Turning to the next slide, slide five, deposits were $11.4 billion at June 30, 2021, a significant increase from $7 billion at March 31, 2021, driven by an increase in deposits from digital currency exchanges, institutional investors in digital assets and other FinTech related customers, with elevated client activity evidenced by the record SEN volume during the quarter. Non-interest-bearing deposits totaled $11.3 billion, representing more than 99% of total deposits at the end of the quarter, as we continue to focus our deposit gathering strategy on digital currency customers. Similar to last quarter, our weighted average cost of deposits for the quarter was essentially zero. Turning to slide six. Net interest margin was 1.16% for the second quarter, compared to 1.33% in the first quarter and 3.14% for the second quarter of last year. The decline in NIM from the prior quarter was driven by lower yield on recent securities purchases, while the decline from prior year was due to a higher proportion of lower yielding interest earning deposits in our asset mix. As Alan mentioned, we invested $4.5 billion into both short and long duration securities during the quarter, which carry a lower yield as a result of the current interest rate environment.

Operator: The first question comes from Joseph Vafi with Canaccord. Please go ahead.

Joseph Vafi: Hey, guys. Good morning. Great to see the continued momentum in the business here. I was just wondering, given some volatility in digital asset pricing, how you -- what you saw relative to that divergence in SEN transaction number versus SEN transfer dollar numbers, because I think the transaction numbers were down a bit, but the actual dollar volume was good and what you might have learned from the volatility we saw and then I have a follow up?

Alan Lane: Yeah. Good morning, Joe. Thanks for the question. I am going to turn it over to Ben in just a second to give a little bit more color. But, yeah, you are absolutely right. And if you step back and look at the volumes in the broader crypto market and look at Bitcoin in particular, on chain transaction volumes, number of transactions on the Bitcoin blockchain really fell off toward the end of the quarter as well. So we kind of are mirroring that, the SEN transfers are mirroring what you are seeing there on the actual blockchain. But in terms of that divergence between the dollar transactions and the unit transactions, I will ask Ben to provide a little bit more color.

Ben Reynolds: Thanks, Alan. Good morning, Joe. So, yeah, as it relates to the decrease in the number of the transactions, we believe that this is due to customers keeping more liquidity at Silvergate in the form of deposits than they needed to execute their trading strategies, which led to larger dollar transfers per transaction, but a fewer number of overall transfers. So to say this slightly differently, it’s really the combination of the market conditions and the deposit balances that customers were maintaining, that made it so that they weren’t managing their capital allocations and trading venues quite as closely. So you can think of that as, before when capital was a little tighter, perhaps, they were making, just let’s say, five transfers per day just to make sure that they had the appropriate amount of capital, the appropriate venue, at the appropriate time and then as more -- as the price came down, as Alan was explaining, maybe instead of five transfers a day, they were doing three transfers a day. So, overall, we think it’s just a temporary outcome as a result of market conditions.

Joseph Vafi: That makes sense. That makes sense. And then just maybe just one follow-up on SEN Leverage, good growth again this quarter, but I think you have said that, perhaps, there could be, maybe -- I know there was kind of a lot of demand there and so maybe with the pullback in digital asset pricing, I don’t know if that has affected your ability to continue to ramp that, that the SEN Leverage balances or perhaps we are kind of finding a better middle ground in between supply and demand right now?

Alan Lane: Yeah. Joe, that’s a good observation. What I would say on this, and again, I will always ask Ben to provide a little bit more color as he’s a little bit closer to it. But we are not really seeing a fall off in demand as it relates to our institutional investor clients, the discussions that we are having with them regarding the product, but it really is more of an issue of -- as you point out the market dynamics and the fact that with the prices coming down, there just has not been as much recent demand for actual borrowing. And therefore, it also, probably, takes a little bit of a back burner in our customers minds in terms of getting activated. But, Ben, do you want to add any additional color to that?

Ben Reynolds: Yeah. Yeah. So consistent with the prior comments, we know that in market conditions like this, it takes time for our customers to optimize the amount of capital that they have in the system. So we think that the right way to look at this is to compare it to traditional asset classes that are more mature and to consider what the needs of institutional investors are in that realm. And so when you do that, you see that the need for prime brokerage, and ultimately, borrowing and lending services is greater than ever in traditional asset classes. Similarly, in those assets, different trading strategies come and go and margins compress. But the underlying need for greater capital efficiency doesn’t go away and we don’t expect it to go away in digital currencies either. And so we remain very, very optimistic in the growth of some leverage going forward and we think that it was a good quarter. As Alan mentioned, the product operated as designed and we didn’t have any losses or even any forced liquidations. So, overall, we feel really good about it.

Joseph Vafi: That’s great. Terrific results. Thanks, guys.

Operator: The next question comes from Michael Perito with KBW. Please go ahead.

Michael Perito: Hey, Alan, Ben, Tony. Good morning.

Alan Lane: Good morning, Mike.

Michael Perito: I want to add just a couple of things I want to hit real quick, just one on the expense side. I guess, just as we look out near-term here, it sounds like there’s maybe some investments going on with building out stablecoin infrastructure, especially with the expectation that Diem will come alive at some point. But outside of growing FDIC insurance expense as deposits potentially continue to grow, are there any other areas that we should be mindful of that you can see costs growing as the bank’s revenues continue to grow?

Alan Lane: Yeah. Tony, do you want to go ahead and jump in and take that one? Thanks.

Tony Martino: Sure. Yeah. No. Absolutely. Thanks for the question, Mike. So, yeah, you are absolutely right. The investment in stablecoin infrastructure is one of the drivers in our fees. Mostly comes through this quarter in professional services. The FDIC insurance, I will say, that about 80% of that expenses due to the rate of growth year-over-year. So if you could think of the balance sheet had stabilized, the run rate would be significantly lower. But as we move forward, I mean, we would continue to invest in headcount that would be probably where we would add technology folk and the like in terms of R&D and continued product development. So that might result in a shift between external professional services fees and internalizing into salaries, employee benefits. But maybe I will wrap up by saying the scalability of the platform in terms of the traditional volumes that we see is not contributing to necessarily increased costs. So you can see our data processing, communication costs are relatively stable.

Michael Perito: Right. No. I am just asking the question a little bit differently. The efficiency ratio in the quarter was pretty low relative to where it’s been. I know you guys don’t provide guidance on that ratio and it’s not always totally relevant. But there’s really -- from an operating leverage standpoint at this point, that -- there should be continued leverage going forward, is probably a fair assumption?

Tony Martino: Yeah. But, I mean, as you have kind of alluded to in this last comment, the revenue dynamics are harder to predict. So it’s hard to put a number on the operating leverage because of that. But certainly the revenue growth that we experienced in this quarter was not really driven by anything related to stablecoin. And so from that perspective, if you kind of peeled off the expenses, which is probably what you are getting at, a lot of that revenue growth is coming from our kind of core expense base. Whereas -- we use that revenue growth and we are investing in kind of what are the next products to add to revenue in the future? So it’s difficult to answer with specific guidance, but definitely the revenue implication has probably a more meaningful impact on the operating leverage than the expense dynamics, which are a little bit smaller on a relative basis.

Michael Perito: Yeah. Got it. And I know, Alan, you have probably provided as much as you could in your opening remarks. But just, I think, I guess, any -- in terms of the pilot per Diem, I mean, is the hope still before the end of the year that it could potentially launch or is there anything else you could provide us on that at this point?

Alan Lane: Yeah. Mike, it’s a fair question and it’s just really difficult for us to provide a direct answer on it. We are obviously diligently working on it. And I think the way we phrased it in the past is that we would be disappointed if we weren’t able to launch the pilot this year. So that’s consistent with the way you just ask the question. That obviously gives us a lot of room here between now and year-end, but we are still working hard on it and incredibly excited about the -- not only that Diem announcement and that project, but just the overall stablecoin opportunity. And we think that as -- and Tony was just alluding to it a little bit in some of his comments. We think it’s the next big, big thing for Silvergate. And the whole area of stablecoin infrastructure, you have probably seen it’s getting a lot of attention in the press and in the regulatory circles as well and we are really excited to be a part of it.

Michael Perito: Okay. Thank you. And then just lastly for me the customer growth for you guys on digital currency side on the SEN has been pretty steady for a while now, but it feels like the fee growth rate has really kind of taken off. I guess it’s more of kind of a structural question. I mean is that a more aggressive sell efforts by you guys? Is that better communication of the potential use of your products to customers that and higher take rate or, I guess, why in the last few quarters here has that currency -- digital currency-related fee growth rate taken off when you obviously you guys have had tons of customers coming on the platform for quite some time now?

Alan Lane: Yeah. It’s really -- if you think about adding customers and the fact that when we onboard a customer, we -- they don’t necessarily immediately start using all of our products and services. So maybe they are attracted by the SEN and they come onboard. And then eventually we get them signed up for API wires of APH. And then -- or maybe they are coming to us because of our ability to do foreign currency exchange. And so it’s really growth in each of those buckets. And one of the things that I think it’s important to remember and we were saying this a lot in the first half of last year and then we have just had so much explosive growth in the last couple of quarters that it’s important to step back and just remember that, none of these things are going to grow in a linear fashion. We really still believe we are in the very early innings of this entire digital transformation. And we believe that the growth is going to continue to be lumpy, that we will have surges in different areas. The -- we believe that long-term growth is absolutely up into the right and -- in each of the areas that we report on, but when you see one area -- one specific KPI, if you will get ahead of another one. It’s just a function of the fact that we are really early in this overall transformation. I am talking about the digital world, not necessarily specific to Silvergate. And so depending on the nature of the particular clients that we have added this quarter or maybe last quarter, that are finally coming on stream this quarter, et cetera. So it’s really hard to predict. But we have seen no slowdown in the pipeline and so we believe we are just going to continue to add customers and they are going to continue to use the products and services that we are offering.

Michael Perito: Great. Thank you guys for taking the questions. Appreciate it.

Alan Lane: You bet.

Operator: Your next question comes from Mike Del Grosso with Compass Point. Please go ahead.

Mike Del Grosso: Good morning, Alan, Tony and Ben.

Alan Lane: Good morning.

Mike Del Grosso: Question around loan growth and the strategy and kind of customers you are going after with SEN Leverage. I know right now it’s focused on more the institutional investor cohort. But as a backdrop, this quarter Square took out a loan for a portion of its Bitcoin for treasury purposes. You are also starting to see Bitcoin miners take out Bitcoin-denominated loans because they are predominantly equity financed. So I guess the question is -- the first question is, have you considered expanding the customer base that you are going after, you can still retain that kind of stringent risk protocol. But it seems like there’s a lot more demand out there than just in the institutional investor base?

Alan Lane: Yeah. Mike, so the short answer is, yes. But I think it’s important to step back and think about the strategy that we are trying to employ here. So we have absolutely entertained conversations with folks such as, you just mentioned in terms of, folks that are maybe long Bitcoin that want to borrow against it. And that’s certainly something because of our SEN leverage product and the fact that Silvergate has been in this ecosystem for eight years and we have got a comfort level and we have got a product that’s working. We could certainly go after that business. But what we are really trying to do is Leverage the network effects of the SEN and continue to press our advantage there with a scalable product as opposed to doing kind of one-off loans that might ultimately end up being somewhat commoditized and really kind of a race to the bottom in terms of someone coming in, and saying, well, if you are doing that loan at 7%, we will do it at 6%, and it’s the same as with any type of loan product, right? And so whenever we think about product and how we are approaching the market, we are thinking about it from the perspective of how do we continue to differentiate Silvergate and also continue to press the advantages that we have with the Silvergate Exchange Network. And I will ask, Ben, if he has any additional comments on SEN Leverage.

Ben Reynolds: Yeah. I mean, I don’t know if I can add much to that. So I think, Alan, covered a lot of ground there. I guess the one thing is that we do -- we certainly are open to other opportunities. And whether that means talking to an exchange about what their needs might be or one of these other providers, as you mentioned, if -- so for -- as an example, if treasuries start adopting Bitcoin on their balance sheet more than this need for financing could grow and that would be something that we would be looking to consider. But as Alan mentioned, we are always thinking about it through the lens of is it scalable, is it -- can we differentiate ourselves, can we create that long-term sustainable competitive advantage.

Mike Del Grosso: Understood. Okay. That’s helpful. And I know -- and I guess, my follow up is on the regulatory landscape. There’s somewhat of an alphabet soup, if you will, of entities looking at stablecoins, whether it’s FATF or FSOCK, OCC, treasury. This week, we had the President’s working group with an anticipated report here in the next few months. It sounds like Diem maybe -- I do want to say on pause, but waiting for more regulatory clarity. Who is the primary regulator that you guys are looking at as far as stablecoin guidelines or whatnot and what’s your expectation around eventual regulation of stablecoins?

Alan Lane: Yeah. That’s a great observation, Mike, and so to directly answer your question, we are an FDIC insured, California State-chartered, member of the Federal Reserve. So add to the alphabet soup, the California, the FTI, the FDIC, obviously, and then the Federal Reserve. Now, so those are the regulators with whom we interface directly. But it wouldn’t surprise you to hear that we have had conversations with many of the other agencies as we are working on this Diem project. And you are absolutely right in terms of the alphabet soup. Everybody’s got an interest in this. There are some interesting dynamic that play and the fact that there were already several existing stablecoins out there, all of whom Silvergate banks. And so we have an interesting view into this ecosystem on behalf of our regulators even before considering the Diem project. And so we are fully engaged with all of the appropriate regulators that you would expect us to be and looking forward to bringing a pilot to market just as soon as we possibly can.

Mike Del Grosso: Okay. Thank you.

Alan Lane: Thanks for the questions, Mike.

Operator: The next question comes from Will Nance with Goldman Sachs. Please go ahead.

Will Nance: Hey, guys. Congratulations on a nice quarter and thank you for taking my questions this morning.

Alan Lane: You bet. Thanks, Will.

Will Nance: Yeah. I wanted to follow up on just the Diem relationship. I was wondering if there are any details you could share around the monetization of the mint-burn fees that you expect to collect on the volume. And then maybe secondarily a higher level question, how are you thinking about the international opportunity for the product? Do you have the capability to support stablecoins and other jurisdictions and currencies and are there any partnerships that you would need to implement those?

Alan Lane: Yeah. Ben, do you want to go ahead and jump in and take some of that and then I -- we can tag team it if you like?

Ben Reynolds: Yeah. Perfect. So -- hi, Will. So a couple of the use cases that we are focused on with stablecoins in general is for commerce and remittance. And so when you think about the unit economics for those services, they are very transactional focused and margins today are very high. So we think that there’s an opportunity for Silvergate to participate in those unit economics, while also reducing the cost of the transaction for the end user, because the underlying technology is just more efficient and there’s fewer intermediaries. So, as Alan highlighted, when we think about monetizing stablecoin efforts, we are really focused on charging transactional fees, first and foremost. There’s also we believe an opportunity to manage the underlying reserve that backs those dollars that are on the blockchain by providing management of the reserve in more of an off-balance sheet manner. And then the third way is to provide more traditional banking services to what we believe is a very attractive new customer segment. So then shifting to kind of the, what does this look like internationally, obviously, remittance is a significant use case and we are excited about that. The question there is sort of what does it look like on the other side in terms of now someone in a foreign country has dollars on the blockchain, is there another bank or a money service business that can move those dollars from the blockchain into the native currency in that area and so there’s still a lot to figure out. As you alluded to, you can imagine a world where there’s euros on a blockchain and yen on a blockchain and that, theoretically, the conversion between dollars and euros could happen by smart contracts and so maybe that’s the answer. The last thing I will say is, we are pretty excited about the work that we have been doing in FX over the last couple of years, setting up those relationships with like minded banks around the globe so that we can hold foreign currencies. And it’s probably -- certainly, probably, too early to provide any guidance on when that could happen or what it will look like. But just in general, the technology enables so much in terms of reducing friction and freeing up capital. So, overall, we are very excited about it. But I will kick it back to Alan.

Alan Lane: Yeah. I -- great. Thanks, Ben. I don’t think I can add anything to that. So let’s keep moving so we can get everybody’s questions.

Will Nance: Yeah. Appreciate it. And then I guess just a follow-up, on the deposit balances this quarter. I think you added handful of new cryptocurrency exchanges and it seems like the average deposits for client increased by decent amount. Kind of wondering what you are seeing in that client base, I would have thought you were fairly penetrated already. So what is the deposit growth look like in terms of growth from new customers versus existing customers?

Alan Lane: Yeah. I can just answer that at a high level, and say that, there isn’t a direct correlation between the clients that we added and the deposit growth per client if you will. It really is -- Ben was talking earlier about the fact that that many of our clients were probably carrying larger balances -- larger cash balances and then perhaps doing fewer SEN transactions but higher dollar transactions, et cetera. So all of those dynamics are at play well and so it’s probably more likely that some of our existing exchanges were holding larger balances at period end versus some new cryptocurrency exchange that brought in a ton of excess deposits.

Will Nance: Got it. It makes sense. Appreciate taking all my questions.

Alan Lane: You bet. Thank you.

Operator: The next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

David Chiaverini: Hi. Thanks. I had a follow-up on Diem, specifically on the economics to Silvergate. Back in May, when the partnership was announced, it sounded like you guys were still in negotiations with the Diem Association. I was wondering if there is any update or more clarity on what sort of level of basis points you are going to get on the mint-burn fees? And then similarly the economics, you mentioned earlier about earning a yield on the reserve deposits. I was wondering how much of a revenue share Silvergate will have to share with the Diem Association. Have those details been figured out yet?

Alan Lane: Yeah. We have not shared any of those details yet and it’s just unfortunately still premature at this time.

David Chiaverini: Got it. And then a follow-up to that question, you mentioned about how stablecoin is the next big thing for Silvergate. Were you simply referring to Diem or was that a reference to business beyond the Diem partnership?

Alan Lane: Yeah. It’s really what I was trying to say there, David, is that, this whole stablecoin idea is really -- and the fact, by the way, that it’s getting so much regulatory attention not only in the U.S., but around the world, just points to the fact that it is a much more efficient way to move fiat currencies in real-time, 24 hours a day, seven days a week. So it has the potential to disrupt all of the normal payment channels and I think that’s why there’s so much interest and attention on it. And if you think about where the existing use cases for stablecoins are, it is really around cryptocurrency trading. That’s what you have seen with Teather and that’s what you have seen with the other U.S. dollar back stablecoin projects. They have been primarily cryptocurrency trading. Although, Circle has certainly been working on penetrating more of the commercial merchant’s remittance use cases. And that’s really where we see the broader opportunity is in remittance and cross-border payments, commercial use cases. And then, for Silvergate, the opportunity to potentially manage the reserve, which is a different opportunity from what we have done so far, but as Ben mentioned in his last commentary, really think about doing that in an efficient off-balance sheet mechanism so that it’s capital efficient.

David Chiaverini: Thanks very much.

Alan Lane: You bet. Thanks for the questions.

Operator: The next question comes from George Sutton with Craig-Hallum. Please go ahead.

George Sutton: Thank you. Guys, I just have one question. I was most enthused by the massive volume that you had on the SEN network this quarter. And I am curious as you think about that massive volume and as we continue to learn more and more about the ecosystem and different players within it. There seemed to be a lot of different use cases you could evolve to either buy versus build to start to generate more income off of that network. Can you just discuss buy versus build and just conceptually how you are thinking about building this out over the next 24 months?

Alan Lane: Yeah. George, thanks for that question. It’s a great opportunity to talk about how we think about potential acquisition opportunities, and Ben, does a really good job of our -- articulating our strategy there. So, Ben, would you like to answer George’s question?

Ben Reynolds: Yeah. Thanks. Yeah. So we are constantly kind of on the lookout for ways that we can make the SEN better, and by better, we mean more useful for our customers. And so -- and when we think about buy versus build, it starts by looking at kind of our own core competencies and what Silvergate is good at and what are the core competencies that we don’t have. And so when we think about acquisitions, we really think about them from the product lens and in terms of what product could we take and plug into the SEN to ultimately create a better experience for our customers, which likely means greater capital efficiency, improved liquidity for the exchanges and so that’s something that we are always thinking about. In terms of, you have kind of -- the first part of your question, George, really sort of hinted at kind of monetization of the SEN and the volume that’s over there. And it really -- we have always maintained a long-term focus in terms of how we think about the SEN and the various iterations of it. And that’s what sort of ultimately got or one of the things that got us to our focus on stablecoin infrastructure. When you think about the conversion from fiat currencies into digital currencies, that’s ultimately essentially what the SEN does. It’s just the U.S. dollar leg of it, but you really, that 24x7 programmatic API-enabled solution is really what makes us the transactional bank for the U -- for U.S. regulated stablecoins and we continue to see growth in transaction volume from those stablecoin projects during the quarter. So anyway so that’s sort of how we think about it at the high level. We don’t have anything to announce today per say, but a lot of things that we are working on.

George Sutton: Thanks Ben. Earlier in the call you mentioned that you were proud of the results that you saw this quarter and I would just say from my perspective you absolutely should be given the environment. Congratulations.

Ben Reynolds: Thanks, George. Appreciate that.

Operator: The next question comes from Eugene Koysman with Barclays. Please go ahead.

Eugene Koysman: Good morning. I wanted to drill down on capital a bit, if I can. So looking at your capital levels with the Tier 1 leverage just under 8%, are you contemplating raising more balance sheet growth capital or just waiting it out to see where the deposit balances mold, while the stock price and thinking ahead of late and it may not be the right time to raise capital today?

Alan Lane: Hi, Eugene. Yeah. It’s a fair question. And we are constantly looking at our capital needs, our anticipated growth and trying to make sure that would be in capital efficient, while at the same time providing us with enough run way to support the growth that we anticipate. But as we have mentioned here a couple of times in a couple of different contexts, we are also looking at off-balance sheet mechanisms to take on some of that growth that might come, for instance, from a stablecoin project such as Diem. And so, you can rest assured that that we are constantly looking at what our needs are. We feel very comfortable where we ended the quarter and very pleased with the two capital raises that we have been able to complete this year so far and we don’t have anything immediately to announce today regarding any future plans. But that’s probably enough color, which was probably doesn’t surprise you.

Eugene Koysman: All right. Thank you. That’s actually -- so when you mentioned the off--balance sheet opportunity that was actually my follow-up. I wanted to see if you can give us a little bit more color on how you were anticipating managing Diem reserves, assuming that there will be a pretty significant dollar volume, specifically with off-balance sheet?

Alan Lane: Yeah. Ben or Tony, would you guys want to jump in on that one?

Ben Reynolds: Yeah. I can start. So, to really get to the heart of your question, Eugene, you have to look at that how the reserves are held. Are they held in cash, are they held in U.S. treasuries. What are the instruments that are actually backing those stablecoin reserves? And when you look at it a lot of the other projects out there, it’s not really clear necessarily what the reserve is being held in. And so, in a world where you are holding reserves in cash or U.S. treasuries, we believe that there are better ways to hold those assets off-balance sheet in a capital efficient way with less of a capital requirement than you would have if you were to hold them on the balance sheet of sort of Silvergate Proper. And so we have more work to do there and really can’t provide to much more detail than that. But that’s how we are thinking about it and it really comes down to the nature of those assets and the liabilities, and then ultimately, the capital that’s required in order to in order to support those.

Eugene Koysman: Right. So in a sense, the structure would be similar to what you have had before where you would sell these two off-balance sheet vehicles and share the yield with Diem or others stablecoin issuers. Is that a fair assumption?

Ben Reynolds: Yeah. I don’t think we have anything to share today in terms of how the yield will be shared between participants. But the initial idea is that the reserve would be held on balance sheet, and obviously, in that situation, Silvergate would be earning the reserve on the -- earning the yield on the reserve itself. But really what we are focused on here is scale. And if you go kind of all the way back to and there’s a few different reasons that you might have a structure like this. If you go back all the way to the President’s working group statement on stablecoins from December, they talked about this concept of bankruptcy remote and which obviously has a different construct than for a bank and FDIC insurance and receivership. And so there’s a lot of different things to figure out there. But ultimately, it’s about striking the right balance between protecting the holders of the stablecoins, making sure that the reserve is invested in the appropriate assets and then making sure that it’s appropriately segregated so that you don’t have any outside forces.

Eugene Koysman: Got it. Thank you. This is very helpful. Appreciate you taking my questions.

Alan Lane: You bet. Thanks, Eugene, for questions.

Operator: The next question comes from Ryan Todd with The Block Research. Please go ahead.

Ryan Todd: Good morning. Thanks for taking my question. So I think most of my questions have been answered, but I guess, one on competition that comes up a lot. So, I guess, continuing from last year, we have seen a growing number of legacy payment providers and networks make strategic moves into servicing the digital asset industry, whether that’s the GIS offering APIs for banks to enable crypto purchases. MasterCard had an announcement today with Circle to enable crypto settlement. I am just wondering if you could comment on how you still view the current state of network effects with the SEN, specifically among your corporate non-crypto exchange customers amid this growing interest from traditional legacy payment providers? Thanks.

Alan Lane: Yeah. Good morning, Ryan. So, on the subject of competition in general. One of the things that we have said consistently is that, this is a growing ecosystem. And if it’s going to turn into -- if it’s ultimately going to be what we all believe and hope it can be then there absolutely needs all the significant players need to come in. And so the announcement that you just referenced today with MasterCard and Circle, which follows a Visa-Circle announcement, et cetera. And there are so many announcements and I can tell you as an industry participant for eight years, I love seeing this, because it just shows that despite the ups and downs of the price, this is here to stay and Silvergate is in a really unique position to continue to benefit from all of this growth. Specific to the SEN, we don’t really see these types of announcements as having any negative impact on what we do, specifically because our use case here with the SEN is specific to providing liquidity, capital efficiency, reducing the banking friction for exchanges and institutional investors. And all of the other use cases that are coming in, we will participate where we see an opportunity with the intersection of the SEN, such as, I mentioned earlier, providing foreign currency exchange, because a lot of our institutional investors are actually non-U.S.-based entities and so providing them foreign currency exchange so they don’t need to leave the SEN in order to complete their transactions and then the stablecoin opportunity which we have talked about is another complement to the SEN. SEN leverage is another complement to the SEN. So everything is in furtherance of this network effect and essentially continuing to solve problems for our customers so that’s -- so we are making them more efficient and that’s what keeps that pipeline coming of new prospects and onboarding of new customers.

Ryan Todd: Great. Really helpful color. Thanks and congrats on the quarter.

Alan Lane: Thank you, Ray.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Alan Lane for any closing remarks.

Alan Lane: All right. Thank you very much, Operator. And I want to -- once again, I want to thank everybody for your participation. Thanks for all of the great questions. And I’d want to -- I just want to do a shout-out before we lose everybody to the incredible team at Silvergate who show up every day literally 24x7, 365 to help solve problems for our customers. We just see a tremendous opportunity to continue to provide innovative solutions for our digital currency customers and we have talked a little bit about Diem on this call. It’s -- I think it’s just one example of the exciting path-forward for Silvergate and the digital currency industry. And we look forward to sharing you some updates on our strategic growth initiatives in the coming quarters. So I hope everybody has a great day. Thank you.

Operator: This concludes our conference. Thank you for attending today’s presentation. You may now disconnect.